Discussion 2: Statement of Cash flows
Please research articles that deal with the benefits which might be derived from the Statement of Cash Flows. How might it be manipulated (although it is far more difficult to manipulate than the income statement or the balance sheet)? What are the differences between the Direct Method and the Indirect Method for preparing the Statement? Which method is preferential and which is most common?
Word limit – 300-350
Referencing – APA
Statement of Cash flows
Cash is an important asset for any organization to ensure the smooth conduct of its business operations. There are financial statements of an organization to understand the company’s financial position but it is the cash flow statement that deals with the cash and cash equivalent transactions.
The following are the advantages of a cash flow statement:
- With the preparation of the cash flow statement, an organization can know both its current cash requirements and plan for the future as well.
- A cash flow statement can also help the company to know the exact inflow and outflow of cash so that there would be proper control over the cash dealings of the company.
- A cash flow statement when used with the ratio analysis can help the company to know its profitability.
There are different ways by which the organization’s cash flow statement can be manipulated. It can be manipulated by changing the non-operating cash, and accounts payable of the company, and also making a delayed entry of the cash received by the company from its receivables. The accountant would also mishandle the cash by selling the company’s receivables. The accounts receivable would be sold to another company thereby reducing the length of time for which the receivables would be outstanding (Nouri & Jaber, 2021)
Differences between the direct and indirect methods of cash flow statement
The cash flow statement can be prepared by using a couple of methods namely the direct method and the indirect method. Under the direct method, the operating activities in the cash flow statement consider the receipts and payments of cash in the day-to-day business activities. Whereas in the indirect method, the variations in the assets and liabilities of the company are adjusted with its net income to find the cash flows from the operating activities in the cash flow statement.
According to the rules, an organization can use either the direct or the indirect method. But the indirect method is time-consuming and the direct method is simple and takes less time for preparation. Though the direct method is simple and has other good attributes it is less popular on the contrary, the indirect method is the most preferred method by the accountants in the companies to prepare the cash flow statement.
Nouri, N. F. A., & Jaber, S. A. H. (2021). Assess the Quality of Profits using the Cash Flow Statement to Improve Profit Forecasting/Applied Study. JOURNAL OF MADENAT ALELEM COLLEGE, 13(1).