Direct and Indirect ways of cash flow systems

A cash flow statement is a financial record that shows how much money is coming in and going out of a company. Cash flow can be recorded in two ways: directly or indirectly. The primary distinction between the two monitoring systems is focused on financial operations, which are contained in the first part of a cash flow statement. The operating portion of the cash flow statement of the direct form of cash flow reporting contains indications of cash coming into the company such as cash-paying to vendors, cash collected from clients, or cash paid to workers. In the indirect method, the net income accrued is included in the operating section to convert it to cash. It is the followed by adjustment that are used to covert the net income from accrual to cash basis. This process involves adding non-cash expenses such as amortization, depreciation or Losses from the sale of fixed assets (Layton, 2015)
The direct method, which is favored by FASB, shows cash flows from companies' activities via a summary of cash-ins and outflows. Most companies, however, do not prefer this method because it needs so much information to prepare. With the direct method, the net income is determined by processes like cash receipts, added interest and dividends and also by deducted cash through payments.
The indirect method, however, calculates cash flow from operations by adjustment of the net income for all items that affect the net income even though there was no actual cash received. This method, unlike the direct method, accurately shows the source of income and how that cash was spent. Income statements are organized on accumulation accounting basis adjustments, therefore, they can be converted to cash based approaches. That way it is easier to calculate cash flow from the company's operations. Simply, cash flow activities include net income, noncash expenses, operation's losses and gains less current assets (Mulford & Comiskey, 2005).
Purchasing Power Parity (PPP)
This is a theory that specifies that conversion tariffs among countries are in equipoise when their buying control is equal. Using PPP is a substitute to using conversion charges because the real acquiring influence of any currency is the measure of the money used to acquire a particular unit of resource. Determination of PPP is measured by a country's comparative rate of living and inflation tariffs. PPP can be explained as the law of one price (Jolliffe & Prydz, 2015).
If the production of goods and services is not growing at similar rates, inflation occurs because when inflation happens, one country's currency tends to depreciate against the other trading company. This is because the main principle of PPP is that they should remain the same. If there are changes in price, then they will result in a definite change in currency exchange rates. When inflation occurs, the home currency is usually at a disadvantage because it gets low purchasing power parity. PPP acts in absence of transport and other transport cost.
Markets then equal the price of indistinguishable goods in two different countries when prices are expressed in same currency. Currency exchange rates, therefore, should always be equal so as to exhibit aggregation level of price. When the money supply increases, that means that people get more money to purchase goods and services. The goods and services don't grow rather it becomes more costly as more people are willing to buy the same product, therefore, that way inflation happens (Jolliffe & Prydz, 2015).


References
Jolliffe, D., & Prydz, E. B. (2015). Global poverty goals and prices: how purchasing power parity matters. Retrieved from https://www.econstor.eu/bitstream/10419/111515/1/dp9064.pdf
Layton, N. (2015). Recording Cash Flows: What's the Difference Between the Direct and Indirect Method? Kashoo. Retrieved from https://www.kashoo.com/blog/recording-cash-flows- whats-the-difference-between-the-direct-and-indirect-method
Mulford, C. & Comiskey, E. (2005). Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance. New Jersey: John Wiley & Sons.