Cash flow statement is a record that depicts how the funds or working capital flow as it moves in or out of the business in a period of accounting that may include a financial year. The small businesses require a frequent preparation of the cash flow statement, and this implies quarterly or monthly while to a great company an annual statement is necessary (Zion Bank). The cash flow statement preparation exists in two forms namely indirect and direct cash flow statement preparation as described below.
The direct method of cash flow preparation is a combination of data from the income statement and the cash flow worksheet derived from the balance sheet. The advantage of the direct method is that it leads to a clear indication of the exact funds collected or paid in the cash form as well as whether the firm relay generated money (Zion Bank). However, it ignores the items such as depreciation and discount on shares among others that do not pertain to cash as well as the investing and financing activities like the interests and dividends.
The indirect method of preparing cash flow involves the report of how money flow from the operating activities via the adjustment of the net income for gains, revenue, expenses and losses that feature in the income statement but do not affect the cash (Zion Bank). The calculation involves accrual as opposed to a cash basis and thus it is complicated since it requires the adjustment of the net profit or loss.
In conclusion, cash flow statement is the record of the movement of working capital or funds in a firm and it may either take the direct or indirect means. The direct method combines information from the cash flow worksheet and the income statement, and thus it indicates the real amount of money generated. However, it ignores non-cash items, financing, and investing activities. The indirect method involves the reporting of cash flow from operating activities. The method is complicated since it takes the form of accrual instead of cash basis and it requires the adjustment of net profit and loss. Regarding the above information, both direct and indirect methods of cash flow preparation have merits and demerits.
