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What are the advantages of using the direct method of preparing a statement of cash flows...

What are the advantages of using the direct method of preparing a statement of cash flows over the indirect method? What types of businesses would use each? Why?

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The advantages of the direct method of preparing a statement of cash flows over the indirect method of preparing a statement of cash flows is:

It is easily understandable to the users of the statement. If the adjustments are reflected in the operating activities, people who don't have knowledge will not be able to understand. If the amounts paid, received are available with the company, it is preferable to use the direct method. It is also recommended by FASB to follow Direct Method of Cash Flows.

  • The companies which follow cash basis of accounting use the Direct Method of cash flows as they don't keep their books on accrual basis to make any adjustments to net income to arrive at the cash balance. They even have the details of various cash receipts and cash payments to keep track record of the same and report in accordance.
  • The companies which follow accrual basis of accounting use Indirect Method of cash flows, as they can be accurate with the amount of cash, because the revenue they report may or may not entirely be in cash. It is easy to them to report the cash flows in indirect method, if the transactions of bank are high in number and time taken. Such details which are been reported in Indirect method are even useful for the management to supplement in the other financial statements they would prepare either for internal circulation or for decision making and external circulation.

Hope it is helpful!!

ekkarill92 answered 1 year ago
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