ACC 281 Week 5 DQ3 - 7433

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What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board (FASB) allow both methods? Which does FASB prefer? Which do you prefer? Explain why.

What are the differences between the direct and indirect presentation of cash flows?

 

The indirect method adjusts net income for items that do not affect cash.  The direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash flows. With the Direct Method, the cash flow from operations is calculated directly. With the Indirect Method, however, the cash flow from operations is calculated by taking the net income of the company and then making adjustments. These adjustments are required because net income is calculated using the accrual method, and we are interested only in cash receipts reduced by cash disbursements.

 

Why does the Financial Accounting Standards Board (FASB) allow both methods?

 

The reason FASB allows both methods is because they both arrive at the same total amount for “Net cash provided by operating activities.” They only differ in how they arrive at the amount.

 

Which does FASB prefer? Which do you prefer? Explain why.

 

The FASB has expressed a preference for the direct method, but allows the use of either method.  I think I would prefer the indirect method because it includes the calculation of adjustments for depreciation, foreign exchange loss, investment income, and interest expenses.  Making adjustments to the net income seems a little easier to do than to calculate everything from scratch. 

 

 

Solution Description


What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board (FASB) allow both methods? Which does FASB prefer? Which do you prefer? Explain why.

What are the differences between the direct and indirect presentation of cash flows?