In order to
learn what is meant by cash flow statement indirect we need to know first what
a cash flow statement is indeed. A cash flow statement is the statement of the
flow of the cash and the flow of the funds of a company. It is the statement
that indicates the effect of changes in the balance and income over the cash
and cash equivalents. The major objective of the cash flow statement is to
break down the cash analysis to show the operating, investing and financing
expenses of a company. The statement is used to capture the changes that occur
in balance sheet due to in flow and out flow of the cash within a company. It
also captures the current operating results of a company and can be used as an
analytical tool to create an image of the short term feasibility of a
company.
The cash
flow statement of a company can be prepared by the direct as well as the
indirect method. The indirect method of preparing cash flow statement is also
called as reconciliation method of preparing cash flow statement. In this
method the net income is adjusted for those products or items that have direct
affect over the reported net income but have no affect on the cash. In this
method the net income is converted into net cash flow by using the operating
activities. The presentation of the cash flow statement by indirect method
starts with the presentation of the net income or net loss. Subsequent
additions and subtractions are made to the net income or the non- cash revenue
is done in order to attain net cash that is provided by the operating
activities. Both the direct and indirect method of preparing cash flow
statement produce the same amount of the net cash however the processes
involved in calculating the net cash flow greatly differ with each other. In
indirect method of preparing cash flow statement the financing and investing
section of the cash activities remains the same however the section of
operating income varies from the direct method. Indirect method of preparing
cash flow statement works backward. It is the widely accepted method as it more
common in use as compared to the direct method. However FASB has approved firms
to use any method to prepare cash flow statement according to their own
requirement and feasibility.
