Question

Use an online yellow pages directory to find a company in your area that has a website on which it has an annual report, including a statement of cash flows. Make an appointment with the controller or chief financial officer of the company. Before your meeting, find out as much as you can about the organization's operations from its website.After asking the following questions, write a brief memorandum to your instructor that summarizes the information obtained from the company's website and addresses what you found out during your interview.Does the company use the direct method or the indirect method to determine the net cash provided by operating activities when preparing its statement of cash flows? Why?

Answer 1

The direct method only takes the cash transactions into account and produces the cash flow from operations. The cash flow indirect method makes sure to automatically convert the net income in terms of cash flow.

A major advantage of the indirect method of cash flows is that the method provides a reconciliation between net income and cash flows. The indirect method also helps financial-statement users better understand different linkages among financial statements and is a simple way of preparing the statement of cash flows.

Which is better the direct or indirect method of cash flows statement?

Direct cash flow statement is broadly accurate as it does not rely on adjustments and hence it takes less to time prepare cash flows statements. The indirect cash flow method cannot be regarded as accurate as it accounts for adjustments and it generally requires more time in preparation.

How do you tell if a company uses direct or indirect method?

While both are ways of calculating your net cash flow from operating activities, the main distinction is the starting point and types of calculations each uses. The indirect method begins with your net income. Alternatively, the direct method begins with the cash amounts received and paid out by your business.

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