Question

Topic #2: For the current year, Bunkers, Inc. decided to switch from the indirect method to the direct method for reporting cash flows from operating activities on the statement of cash flows. Will the change cause the amount of net cash flow from operating activities to be larger, smaller, or the same as if the indirect method had been used? Explain.

Answer 1

There are two methods of calculating the Cash Flows from Operating Activities

(1) Direct Method

(2) Indirect Method

Under both the method, the amount of Cash Flow from operating activities are same.

There is no difference in the amounts of operating activities prepared by indirect method and direct method.

In Indirect Method starting with Net Income and non-cash expenses will be added and non-cash incomes will be subtracted and adjust working capital adjustments to arrive cash flow from operating activities.

In direct method, we can directly take all collected cash from revenues and subtract all cash payments for operation like expenses, cash payments made to suppliers for supply of goods and services, salaries and other operating expenses.