Principles of Finance Course Project Essay

937 WordsJan 17, 20154 Pages
Revenues and expenses are reported in the income statement, and generally companies use accrual accounting, so the income statement does not disclose much about how the cash is flowing in and out of the business, in order to provide an insight of how the cash flows, companies turn to the cash flow statements, which contain a section that reiterates income on a cash basis. This means that there is a choice between using two methods to report the operational cash flow direct and indirect methods. “Equally the direct and indirect methods require cash flows to be grouped according to operating, investing, and financing activities; the different presentation will only affect the operating section, and the investing and financing sections do not change between the two presentations,”(Bank, E.2015). The “operations section deals with the question of direct versus indirect cash flows, by comparing the operations section with the income statement, one could identify the differences in timing between income and cash collections; and the comparison will also reveal the timing difference between expenses and cash payments, However a sizable differences could point out that the company is extremly assertive in recognizing income, or that the company spends a lot of cash to buy or maintain assets, a fact not apparent from the income statement,”(Bank, E.2015). When using the direct method, the cash flows are listed in the operations section of the cash flow statement. “Cash flows due to operations result from customer collections and cash paid to suppliers, employees, etc., this section also reports cash paid for income tax and interest; however the problem in trying to use the direct method is that a company might not keep the information in the required form, for example, companies using accrual accounting lump together cash and credit sales, they would have to make special

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