Direct Cash Flow Method

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The statement of cash flows is a financial statement that explains where a company got its cash, how it spent its cash, and how much cash was held during a period (Kemp & Waybright, 2013). The two different formats that can be used when creating a statement of cash flows are the indirect method or the direct method. Both of the methods will report the same net cash from operating activities, investing activities, and financing activities. The only difference between the two methods is how the operating activities are formatted and recorded. I will discuss the difference between the indirect and direct cash flow methods in regards to the operating, investing, and financing activities as well as the relationship between the beginning cash balances …show more content…
The indirect method uses the net income from the income statement and then makes adjustments to find net cash for the operating activities. The adjustments need to be added or subtracted depending on each entry. For example, a depreciation expense taken from the income statement must be added to make the adjustment to net income of the statement of cash flows. Next, a gain or a loss on a sale of long-term assets must be entered for adjustment. If the business were to sell a piece of land and gain $10,000 on it, the accountant will subtract $10,000 from net income on the statement of cash flows to make the adjustment. Next, an increase or decrease in current assets other than cash must be entered for adjustment. A $5,000 increase in accounts receivable must be subtracted and a $5,000 decrease in inventory must be added to net income on the statement of cash flows to make the adjustment. Lastly, any increase or decrease in current liabilities must be entered for adjustment. A $2,000 decrease on a short-term note payable must be subtracted and a $2,000 increase on accounts payable must be added to net income on the statement of cash …show more content…
Cash receipts from the issuance of any note or bond payable will be added. Payments of any note or bond payable will be subtracted. Payments of dividends will be subtracted. Receiving $20,000 for issuing common stock will add $20,000 to the cash receipts from the issuance of stock. Selling $10,000 of treasury stock will add $10,000 and buying $10,000 of treasury stock will subtract $10,000 from financing activities. Receiving $25,000 for the issuance of a note or a bond will add $25,000 to financing activities. Paying $10,000 of a note or a bond payable will subtract $10,000 and paying $2,000 for dividends will subtract $2,000 from financing activities. Totaling all of the accounts together, we will reveal the net cash for financing activities. To determine the cash balance at the end of the year, the accountant will total the operating, investing, and financing activities and add that amount to the prior year’s net cash to determine the end of year net cash. Determining the net cash will reveal what the business has been doing with its cash during the year and it will explain whether it is working or not. The statement of cash flows is a complete report of the businesses

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