Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 12 - Statement of Cash Flows - Questions: 9

Answer

Step1: a) DIRECT METHOD b) ADVANTAGES OF DIRECT METHOD c) DISADVANTAGE OF DIRECT METHOD Step2: a) INDIRECT METHOD b) ADVANTAGES OF INDIRECT METHOD c) DIS-ADVANTAGES OF INDIRECT METHOD Step3: Yes, both methods are acceptable and the method accepted by FASB is direct method of preparation of cash flow.

Work Step by Step

Step1: a) Cash flow under direct method is a method under which collection of customers and other operating receipts minus all operating disbursement equals net cash provided by operating activity b) - It's very simple for understanding - Under this method information is shown which is not shown elsewhere in the financial statement. - The method shows two cash flows involved in the trading operations of the entity 4. The knowledge of specific sources of cash flows and purposes for which cash payment were made in past periods may be useful in assessing future cash flows c) There may be significant cost and time required in preparing the information as it is not revealed elsewhere in the financial statement. Step2: a) Under indirect method opening and closing balances of profit and loss account are not taken into account. The statement showing funds from operations starts with the net profit figure as per profit & loss account. Thereafter non fund or non operating items that appear on the debit side of the profit & loss account are added back and non fund items appearing on credit side are subtracted. The resulting figure is fund from operations. b) - The cost involved in preparation is relatively lower - It reconciles operating profit to net cash flows from operating activities so the user can easily relate trading profit to cash flows and can understand if they are represented by real cash flows. c)There is lack of information on the significant elements of trading cash flows. Step3: The most popular method of preparation of cash flow is indirect method of cash flow
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