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To prepare a statement of cash flows the first stepdetermining the change in cashis a simple computation.
Methods of preparation of cash flow statement. Illustration of an Indirect method. In the direct method all individual instances of cash that are received or paid out are tallied up and the total is the resulting cash flow. There are two main methods for preparing a cash flow statement to consider.
As we learned earlier we can prepare a statement of cash flows using direct or indirect method. The preparation time for the cash flow direct method isnt much since it only uses cash transactions. The main difference between the two methods is that the data used to calculate cash flow from direct method is different from the data used in indirect method.
There are two ways to prepare your cash flow statement. The Cash flow statement under Direct method is prepared as follows. Therefore it provides a more accurate statement of how cash is flowing in and out of.
The cash flow indirect method needs preparation as the adjustments that are made to require time. The advantage of the direct method over the indirect method is that it reveals operating cash receipts and payments. The direct method shows each major class of gross cash receipts and gross cash payments.
Indirect method of cash flow Both methods of cash flow analysis yield the same total cash flow amount but the way the information is presented is different. The two methods differ in terms of how the cash flow from operating activities is calculated. In the direct method the cash flow from operating activities is computed directly as the net sum of all operating cash flows.
The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. Before you start creating a cash flow statement you need to decide how to record cash flows from operating activities either the direct method or the indirect method. Compute the net increase or decrease in cash and cash equivalents by making a comparison of these accounts given in the comparative balance sheets.
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