Reference no: EM133168661

Questions -

Q1. The purpose of the statement of cash flows in financial reporting is to provide information on "the major cash inflows and cash outflows during the period of the income statement" (Averkamp, n.d.). The statement also provides "a reconciliation of the change in a company's cash and cash equivalents from the beginning of the accounting period to the end of the accounting period" as well as provides supplementary information such as the amount paid in income taxes, interest paid and any significant noncash investing and financing transactions (Averkamp, n.d.). The statement of cash flows can answer the following questions:

1. How does the company obtain its cash?

2. Where does the company spend its cash?

Q2. The cash flow statement reports cash receipt (in) and cash payments (out) for a period. The cash flows are broken down into operating, investing, and financing actions (Wild & Shaw, 2021, p 460). In addition, that statement shows the sources and uses of certain cash flows (Bragg, 2022).

In analyzing the cash flow statement can a company meet obligations.

In analyzing the cash flow statement can the company expand operations.

Q3. Direct method is the presentation of net cash from operating activities for the statement of cash flows that lists major operating cash receipts less major operating cash payments. It separately lists operating cash receipts and operating cash payments, then cash payments are subtracted from the cash receipts.

Indirect method is a presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows. However, it does not report individual items of cash inflows and outflows in operating activities.

A corporation has an option to seek either method for the purpose of reporting, depending on the situation and compliance requirements. The direct cash flow method is very accurate and does not rely on adjustments, so it takes less time to prepare the statements. I would consider it the best out of the two methods.

Q4. While both the direct and indirect methods are used to generate a cash flow statement, they are slightly different. "The cash flow direct method determines changes in cash receipts and payments, which are reported in the cash flow from the operations section. The indirect method takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow." The indirect method will always begin with the net income from the income statement. The indirect method presents its statements with income or loss, with additions and deductions from the amount for non cash revenue and expense. When it comes to the direct method it lists the cash receipts and payments that were made during the accounting period. Both methods are great when dealing with cash flows. However, I believe the direct method is better because of its accuracy.