In accounting, a statement of cash flows shows the history of the company’s ingoing and outgoing money operations during a definite time period. This statement shows how changes in accounts and a company’s balance affect cash equivalents, which is essential to determine a company’s creditability.
There are two different ways to create a cash flows statement. A direct cash flow statement starts with cash operating activities: sale of goods and services, cash received from customers, and cash payments to operating expenses, taxes and interests paid. Then cash flows from investing activities are calculated: received dividends and proceeds from the sale of equipment. After cash flows from investing activities are calculated, cash flows from financing activities should be calculated, which are usually limited to dividends paid.
The presentation of indirect and direct cash flow methods is different.
Presentation of direct method:
Presentation of indirect method:
Accountants mainly use the indirect method for a number of reasons. The main reason is that this method considers the operating profit of the company which is not very tedious to calculate since most of the figures are available. The indirect method is tedious considering it will take a number of days to sustain the actual amount paid to customers or received from customers.