Cash flow statement

The cash flow statement

The cash flow statement, as the name implies, summarizes a company's cash flow statement. When a corporation wants to show income based on cash flow, this statement is greatly preferable over the income statement, which does not provide much information on cash. The income statement emphasizes revenue rather than cash. The cash flow statement is organized into three sections: investing, financing, and operations. The latter categorizes the direct and indirect techniques of creating a cash flow statement. The direct method categorizes the operations section of the cash flow statement based on the transactions made by a company which can be regarding cash receipts and payments. Cash receipts are mainly regarding money paid in on a daily basis by clients. Cash payments include salaries to employees, payments to suppliers and tax on income just to mention but a few. It is recommended that a company keeps separate the record for cash sales from that of credit sales for easy tracking (Farshadfar and Monem, 2013).

The indirect approach

The indirect approach involves adjusting an income statement prepared by companies that run an accrual system of accounting thus modifying it into a cash flow statement. This method which does not give as much information as the direct one starts with the net income realized by an organization (Farshadfar and Monem, 2013). The reverse process of what is done to get net income is utilized whereby depreciation is added right back while liabilities are excluded. The losses incurred on the sale of fixed assets are also accounted for in the process.

The Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB), which was established in the year 1973, is a private agency responsible for setting accounting standards that cut across public companies in the United States (Collins, Pasewark, and Riley, 2012). In my own opinion, I do agree with the FASB in favor of the direct method. The reason is that the direct approach draws a clear line between cash receipts and payment, which makes it easier to compare against an income statement.

References

Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), 111-133.

Collins, D. L., Pasewark, W. R., & Riley, M. E. (2012). Financial reporting outcomes under rules-based and principles-based accounting standards. Accounting Horizons, 26(4), 681-705.