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Direct and Indirect Cash Flows

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Direct and Indirect Cash Flows

XAC/291

When a company has to revenue and expenses on its income statements, they often have the choice of using a direct or indirect presentation of cash flow. Direct presentation of cash flow begins with cash from sales and is deducted from the operating expenses to conclude to a net cash flow from expenses. Cash from operations come from customers, cash paid to suppliers, employees and other expenses. One of the reoccurring problems with the direct presentation of cash flows is the inability to find or track information in regards to the cash flows. Companies would have to make alterations in order to find where cash and credit would have come from in hopes to narrow down their search for specific information.

The indirect presentation of cash flow begins with the net income from the income statement, unlike the direct presentation of cash flow, and separated into three sections known as Expenses, ash, and Revenues. Ultimately, what is being done is that the net income would be adjusted from accrual to cash. Accounts that fall into the use of the indirect method are inventory, supplies, accounts receivable, unearned revenues, liabilities, and prepaid assets. Depreciation, amortization, and losses are some of the methods that would be typically used while performing an indirect presentation of cash flows. The indirect method uses all available information to come to a conclusion and is often said to be the main version that most companies use for their cash flows presentation.

The Financial Accounting Standards Board allows both direct and indirect methods of presentation of cash flows because they both provide the necessary forms required according to their summary of statements. Any company has to report their statement of cash flows as a part of the financial statements. To show

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