Question

One of the key differences between direct and indirect method is the the type of transactions...

One of the key differences between direct and indirect method is the the type of transactions used. The indirect method uses net income as the base and converts the income into cash flow through the use of adjustments. The direct method only takes the cash transactions into account and produces the cash flow from operations.

Another difference is that indirect method makes sure to convert the net income in terms of cash flow automatically. Cash flow direct method, on the other hand, records the cash transactions separately and then produces the cash flow statement.

The cash flow indirect method needs preparation as the adjustments that are made to require time. The preparation time for the cash flow direct method isn’t much since it only uses cash transactions.

Both the direct and indirect cash flow method are useful at different points and they can be used depending on the situation and the requirement. The indirect method is the most popular among companies. But it takes a lot of time to prepare (before recording) and it’s not very accurate as many adjustments are used.

The direct method, on the other hand, doesn’t need any preparation time other than segregating the cash transactions from the non-cash transactions. And it’s more accurate than the indirect method.

Question: Why the indirect method is not accurate?

And why the indirect method is used more widely? (except the reason that it is far easier, and the direct method is complicated in a real company)

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The indirect method considers the opening and closing balance of ledger accounts in determining the movements and computing cash flows. If there are wrong postings in the ledger account the cash flows determined are not accurate since only opening and closing balances are considered. In direct method since each line item of ledger is classified into cash and non cash it leads to accurate computation of cash flows.

The indirect method is more widely used because the opening balance and closing balance of accounts are easily available in the published financial statements and hence the users of cash flow statement can correlate the balances with published results of financial statements. It makes sense since all the information is available at one place and users can question management on any particular cash flow which is not clear to them.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1/ Both the direct method and the indirect method of computing net cash flow from operating...
1/ Both the direct method and the indirect method of computing net cash flow from operating activities convert accrual-based income statement amounts into cash flows. TRUE/ FALSE 2/ Under the indirect method, when machinery is sold at a gain, the gain is added in the operating section of the statement of cash flows and the cost is added in the investing section. TRUE/FALSE 3/ All of the following are financing activities except: Multiple Choice * 

Selling capital stock.
 * 

Lending...
Direct or indirect? Most companies report operating cash flows using the ___________ method. Net income is...
Direct or indirect? Most companies report operating cash flows using the ___________ method. Net income is reconstructed on a cash basis when the ___________ method is used to report the net cash flows provided (used) by operating activities. The net cash amount provided by operating activities using the direct method is ____________ that computed using the indirect methods. The FASB recommends that the operating activities section of the statement of cash flows be reported using the ____________ method.
Adjustments to Net Income with the Indirect Method Assume that a company uses the indirect method...
Adjustments to Net Income with the Indirect Method Assume that a company uses the indirect method to prepare the Operating Activities section of the statement of cash flows. For each of the following items, indicate whether it would be Added to net income, Deducted from net income, or Not Reported in this section of the statement under the indirect method. The options for each are added, deducted or not reported 1. Depreciation expense 2. Gain on sale of used delivery...
Cash Flows from Operating Activities—Indirect Method The net income reported on the income statement for the...
Cash Flows from Operating Activities—Indirect Method The net income reported on the income statement for the current year was $202,100. Depreciation recorded on equipment and a building amounted to $60,400 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $51,330 $54,410 Accounts receivable (net) 65,090 67,140 Inventories 128,330 115,680 Prepaid expenses 7,130 7,670 Accounts payable (merchandise creditors) 57,340 60,720...
MC Qu. 12-82 Bailey Hill Co. uses the indirect... Bailey Hill Co. uses the indirect method...
MC Qu. 12-82 Bailey Hill Co. uses the indirect... Bailey Hill Co. uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n): Multiple Choice subtraction of $14,000. addition of $14,000. addition of...
1. Cash Flows from Operating Activities—Indirect Method Staley Inc. reported the following data: Net income $283,600...
1. Cash Flows from Operating Activities—Indirect Method Staley Inc. reported the following data: Net income $283,600 Depreciation expense 61,800 Loss on disposal of equipment 25,900 Increase in accounts receivable 18,000 Increase in accounts payable 11,800 Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments. Staley Inc. Statement of Cash Flows (partial) Cash flows from...
Cash Flows from operating activities -indirect method The net income reported on the income statement for...
Cash Flows from operating activities -indirect method The net income reported on the income statement for the current year was 185000 depreciation recorded on equipment and a building amounted to 96000 for the year. Balances of the current asset and current liability account at the beginning and end of the year are as follows: End of Year Beginning of Year Cash 75,900 86150 Accts receivable 84550 90000 Inventories 186200 175000 prepaid expenses 3600 4500 Accounts Payable 91500 110000 Salaries Payable...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Yellow Dog Enterprises Inc. at December...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Yellow Dog Enterprises Inc. at December 31, 20Y8 and 20Y7, is as follows: Dec. 31, 20Y8 Dec. 31, 20Y7 Assets Cash $74,770 $92,010 Accounts receivable (net) 114,890 124,040 Merchandise inventory 164,120 153,730 Prepaid expenses 6,690 4,660 Equipment 334,330 275,450 Accumulated depreciation-equipment (86,930) (67,550) Total assets $607,870 $582,340 Liabilities and Stockholders' Equity Accounts payable (merchandise creditors) $127,650 $121,710 Mortgage note payable 0 174,700 Common stock, $1 par 19,000 12,000 Paid-in capital:...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Merrick Equipment Co. for December 31,...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows: Dec. 31, 20Y9 Dec. 31, 20Y8 Assets Cash $222,710 $208,610 Accounts receivable (net) 80,680 74,920 Inventories 227,760 221,840 Investments 0 85,940 Land 116,820 0 Equipment 251,290 196,120 Accumulated depreciation—equipment (58,830) (52,890) Total assets $840,430 $734,540 Liabilities and Stockholders' Equity Accounts payable $152,120 $144,700 Accrued expenses payable 15,130 19,100 Dividends payable 8,400 6,610 Common stock, $10 par 45,380 35,990...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Merrick Equipment Co. for December 31,...
Statement of Cash Flows—Indirect Method The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows: Dec. 31, 20Y9 Dec. 31, 20Y8 Assets Cash $239,430 $222,980 Accounts receivable (net) 86,740 80,090 Inventories 244,850 237,110 Investments 0 91,860 Land 125,590 0 Equipment 270,150 209,640 Accumulated depreciation—equipment (63,250) (56,530) Total assets $903,510 $785,150 Liabilities and Stockholders' Equity Accounts payable $163,540 $154,670 Accrued expenses payable 16,260 20,410 Dividends payable 9,040 7,070 Common stock, $10 par 48,790 38,470...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT