Can any one suggest some reading material on Direct and non -direct method of calcuating cash flows? I find it very confusing and end up getting most questions wrong. Ot if some one can explain a strcutred and simplified approach, that would be great ( I know am asking for spoon feeding!!) I assume topic is important and 1-2 question would show up on the exam related to this. Please correct me if am wrong.Thanks
You and me both! I would love a good Dummy guide for the Direct and In-Direct methods.
Direct/Indirect only differs in the operating section of the cash flow statement. Investing and Financing will look the same under both methods. The direct method will list the sum of each category of operating cash flows (Cash receipts from customers, Cash payments to suppliers, Cash paid to employees, Cash paid for operating expenses, Taxes paid and Interest paid). To get each of these values you would start with an income statement item and then adjust for accruals and non-cash items (e.g. to get Cash receipts from customers you would start with Sales and then add the beginning balance of AR and minus the ending balance of AR). So the direct method basically goes through the income statement line by line calculating the cash flow effect of each line. The indirect method skips going line by line through the income statement and starts with the net value of the income statement (net income) and then makes all the same accrual and non-cash adjustments we would have made anyway. So instead of having the change in AR being put to the ‘Cash receipts from customers’ line under the direct method it would have its own line as ‘Increase (or decrease) in Accounts Receivable’ under the indirect method. Indirect method will always be faster.