The cash flow statement, income statement, and balance sheet are all interrelated. While the cash flow statement shows the cash inflows and outflows, the income statement describes the use of assets and liabilities in a stated accounting period (Barth, Landsman, and Lang, 2008). The cash flow statement reveals the amount of cash that a company has at hand. The information also reflects in the balance sheet. Each financial statement gives a portion of financial condition information. They provide a complete financial picture when used together.
Cash flow from operating activities is a section in the statement of cash flow included in the financial statement of the company after the completion of the income statement and balance sheet. The cash flow activities are important to those who want to analyze the investing activities of a company. Cash flow from investing activities in the cash flow statement reports change in a company’s cash position depending on the loss or gain made (Hung, 2000). All the financing activities are important to investors and have to be available to the public for analysis.
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The major difference between the direct and indirect methods for the statement of cash flow is the treatment of cash flows from operating activities. The cash flow from operating activities used in the direct method includes lines such as cash paid to suppliers and cash from customers. The indirect method shows net income followed by adjustment required to convert the total net income to cash from operating activities. The direct method helps in the reconciliation of net income to cash from operating activities. A company can choose to use either of the methods since they are all GAAP compliant (Jeanjean and Stolowy, 2008). The derived amount of net cash is the same for both methods. Almost all corporations use the indirect method to prepare their cash flow statements.
References
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research , 46 (3), 467-498.
Hung, M. (2000). Accounting standards and value relevance of financial statements: An international analysis. Journal of accounting and economics , 30 (3), 401-420.
Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of Accounting and Public Policy , 27 (6), 480-494.
