More cash flow information can be obtained and it is more easily understood by the average reader. It shows operating cash receipts and payments. It adjusts each item in the income statement to its cash equivalent.The direct method discloses operating cash inflows by source (e.g., cash received from customers, cash received from investment income) and operating cash outflows by use (e.g., cash paid to suppliers, cash paid for interest) in the operating activities section of the cash flow statement.Companies can use either the direct or the indirect method for reporting their operating cash flow. There are two methods of converting the income statement from an accrual basis to a cash basis. Finally, non-operating gains and losses enter into the determination of net income, but the related cash flows are classified as investing or financing activities, not operating activities.Another reason is the many timing differences existing between the recognition of revenue and expense and the occurrence of the underlying cash flows.These expenses, which require no cash outlays, reduce net income but do not affect net cash flows. One reason is non-cash expenses, such as depreciation and the amortization of intangible assets.Net income differs from net operating cash flows for several reasons. The beginning and ending cash balances on the statement of cash flows tie directly to the Cash and Cash Equivalents accounts listed on the balance sheets at the beginning and end of the accounting period.
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