Thesis: Methods for Preparing Statement of Cash Flows

Sample Thesis Paper

The two methods applied in preparing a statement of cash flows are the direct method and indirect method. Both of these methods are same except the cash flow from operating activities which is different. The cash flow from operating activities under the indirect method is prepared by adjusting the net income with non cash items and taking the effect of increase and decrease in current assets and liabilities which make up the working capital of the company. The indirect method begins with the net income of the company and adjustments of non cash items such as depreciation and amortization are made to reconcile this amount with the actual cash basis income or operating income of the company. The changes in working capital due to increase or decrease in current assets and liabilities are added and deducted to arrive at the cash flow used in operations or cash flow generated from operations (Shim and Siegel 2005).

The cash flow from operating activities in the direct method is prepared by taking into consideration the actual receipts and payments of cash in a company. Unlike the indirect method the direct method uses the actual receipts and payments of the company to arrive at the cash flow from operations. The cash flow from operations calculated using the direct method yields the same result as indirect method, the only difference between the two methods is the representation of amounts in the statement during calculation of cash flow from operating activities. Both the direct and indirect methods are acceptable under Generally Accepted Accounting Principles (Sands 2004).

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