Question

Using sources and statements, explain the two-finger approach to cash flow statements?

Answer 1

DIRECT METHOD

Under the direct method, the preparer will include line items for cash received from customers and cash paid to suppliers. Sometimes this information is not readily available as companies record cash and credit sales together, or do not separate cash and credit payments to suppliers. The task of gathering or collecting this type of information is an additional step not found in the indirect method.

INDIRECT METHOD

The indirect method starts with net profit and makes adjustments to convert your accounting system from the accrual basis to the cash basis.These adjustments come in the form of adding back in non-cash expenses and changes in a company’s typical balance sheet accounts. With the exception of cash, you adjust the changes in current assets and liabilities like accounts receivable, inventory, prepaid assets, and unearned revenues.