Cash Flow Statement and Indirect Cash Flows Essay

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The statement of direct and indirect cash flows are financial statements that companies prepare each month. Both methods report the cash flows differently but in the end each statement will result in the same amount. The operating activities provides a company with financial flexibility to invest in other parts of its business such as purchasing new equipment or paying off debt. Investing activities pertain to making capital expenditures such as new equipment. Financing activities relate to borrowing money, issuing stock or paying dividends.

A direct statement of cash flow identifies a company's sources and uses of cash. The statement has three sections that report cash receipts and cash payments. These sections include operating, investing and financing activities. Operating activities include receipts and payments from normal business operations while investing activities include the purchase or sale of long-term asset and investments. Lastly, financing activities relate to making payments to creditors and investors. The indirect method reports operating cash flows based on changes in the balance sheet from period to period as they relate to net income. Instead of reporting the total cash received from customers an indirect statement only lists the change in cash received from the previous period.

The Financial Accounting Standards Board allows both statements of cash flow preparation methods because the purpose is to show the cash inflows and outflows from each activity.

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