Cash Flow Essay Example | Topics and Well Written Essays - 250 words

Cash Flow - Essay Example It (comparison) also identifies the differences in timing between cash payments and expenses. Through the direct method of cash flows, reconciliation of the actual cash flows from operating activities with the accrual-based accounting net income can be done. The company’s stated profitability and its cash holding position is therefore clearly presented to its stakeholders in this manner. The indirect method of cash-flow preparation requires a well-established link between the balance sheet and the income statement. The statement users are therefore, able to systematically and logically view the company’s financial statements. The company’s current assets and liabilities reflected on the balance sheet are easily traced back to its operations summarized in the income statement. The use of indirect method makes it possible to disclose the company’s non-cash transactions. The statement users are therefore, in a better position to understand how non-cash transactions are not sources of cash flows but factors of net income. Direct method is an alternative to the indirect method of cash flows. The company’s cash payments and receipts with detailed categories are disclosed separately when using the direct method. Such a practice can make the financial statement to appear clustered. Auditors also tend to ask for an additional reconciliation schedule on cash flows and income from company’s using direct method. However, accounting rule-setting authorities allows companies to use indirect method by disclosing, in a simpler statement format, changes in current assets and liabilities. As a CFO I would prefer the indirect statement of cash flows method. The indirect method starts by identifying the companys net income or loss. Subsequently, any non-cash expenses, such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a