The cash flow statement represents the company’s expenditure of its cash. The primary objective of creating a cash flow statement is to see a firm’s cash sources and to track the cash expenditure over a particular time period. So, it is difficult to manipulate as it represents both cash in and cash out. Accounting practices, procedures and policies do not affect the cash flow statement ( Flower, 2018) . It is essential since it informs the readers about the company cash position. For a company to be successful, it should have adequate cash every time. It h for requires cash for paying its expenses, for paying bank loans, for paying taxes and for buying new assets ( Garrison, Noreen, Brewer & McGowan, 2010) . A cash flow statement determines if a company has sufficient cash for meeting all these, as well as cash gotten from its operational, financing, and investing activities.
It also helps in determining the cash flow from various sources and activities. Also, the cash flow data offers the details concerning the quality of business revenues that is, whether all accounts receivable of the firm are paying their dues on time or not. Cash flow may be easily understood with the aid of cash flow statement, by the ones who do not have sound accounting knowledge ( Garrison et al., 2010) . It as well aids the managers to know about the company’s operational effectiveness by measuring the flow of cash from operational activities. Also, by analyzing the statement of cash flow, investors can know the flow of cash in financial and investment activities and the sources of money the company used to raise the cash.
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Overall, the cash flow statement assists managers to effectively manage and monitor cash flows, which provides the managers and owners insight into the cash position of the company. This knowledge better prepares the management to make informed decisions regarding regular business operations, the necessity for more investment in the company, and capital from debt or equity partners ( Flower, 2018) . Although the cash flow statement is not the only method of monitoring cash flows, it is a crucial party of the reporting statements and must not be ignored by the users of financial statements.
Strengths of the Direct Method
It requires a direct link between the balance sheet and income statement, which aids the users to systematically view the business’ financial statements ( Bradbury, 2011).
It allows for the analysis of the shift in current liabilities and assets to know the funds received and spend sin operating activities.
It facilitates reconciliation between the accrual-based net income and actual cash flows from operational undertakings. It provides the firm’s specified profit and its cash status.
It aids in understanding how non-cash items impact the entity net income/profit but does not impact cash.
It is recommended by both GAAP and IAS to companies as a method of [resenting operating cash flows.
It is easier and straightforward to understand by the readers.
Weaknesses of Direct Method
It is less acceptable under different laws.
It ignores non-cash expenses, since it directly compares the funds paid or received from contractors.
It overlooks contrast of current liabilities and assets of present year with preceding year ( Flower, 2018) .
It is more challenging to prepare as the information is hard to gather.
Strengths of the Indirect Method
It reports directly the cash flow from accounts payable and receivable.
It is easy to understand by accounting professionals for monitoring the cash flow.
Weaknesses of Indirect Method
It is difficult to analyze
Preparing cash flow statement under this method is time consuming.
References
Bradbury, M. (2011). Direct or indirect cash flow statements?. Australian Accounting Review , 21 (2), 124-130.
Flower, J. (2018). Global financial reporting . Macmillan International Higher Education.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education , 25 (4), 792-793.
