As you consider statement of cash flows, keep in mind that it uses a
different way of thinking than typical accounting activities, as there are two
common methods (direct and indirect).
The statement of cash flow allows companies to account for capital that the
company has yet to receive from accounts receivable. It allows accountants
to show reconciliation between capital gained and capital that the company
has yet to receive. Cash flow statements can provide information outside of
what is represented in the income statement and balance sheet, as it relates
to liquidity and solvency, as well as how the company manages its assets
and repayment of debt. The statement of cash flow, along with the income
statement and balance sheet, are required reporting documents according
to GAAP.
Companies may choose either a direct or indirect method for reporting
statement of cash flow. According to Whalen, Jones, & Pagach (2017), in
the direct method, “a company computes operating cash inflows and
deducts its operating cash outflows to determine its net cash flow from
operating activities,” and “under the indirect method, a company’s net
income is adjusted (reconciled) to its net cash flow from operating
activities.”
References
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting
and analysis. Boston, MA: Cengage Learning.
