AMP 415 Module 4 DQ 1

Direct method-
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest paid
Income taxes paid

Net cash from operating activities xxx

Indirect method-
Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation
Foreign exchange loss
Investment income
Interest expense

Increase in trade and other receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations
Interest paid
Income taxes paid

Net cash from operating activities xxx

With the Direct Method, the cash flow from operations is calculated directly (from scratch). With the Indirect Method, however, the cash flow from operations is calculated by taking the net income of the company and then making adjustments. These adjustments are required because net income is calculated using the accrual method, and we are interested only in cash receipts reduced by cash disbursements (the cash method). These adjustments include:
· Adding back expenses that were deducted from net income but did not cost anything (e.g., depreciation expense, amortization expense, and depletion expense);
· Taking out capital gains and losses that do not relate to operations (e.g., sale of plant assets);
· Taking out expenses that were accrued but not yet paid (e.g. income taxes accrued but not paid in the current year)
· Taking out expenditures that cost cash but were not expensed this year (e.g., the purchase of inventory that was not sold or supplies that were not used up, and the payment of prepaid expenses still outstanding at the end of the year);
· Taking out income that was accrued but not yet received (e.g., credit sales where the account receivable is still outstanding, accrued interest not yet received); and
· Adding back cash receipts that were not treated as income (e.g. customers payments of accounts receivable that were generated in a prior year)

(retreived data from

http://smallbusiness.chron.com/direct-vs-indirect-cash-flow-method-65970.html)

The main difference between the direct method and the indirect method involves the cash flows from operating activites, the first section of the statement of cash flows.

I personally am more inclined to like the direct method. My reasoning is because I like that it has to deal with money exchanging in real time and there isn’t very much room for error or misinterpretation. When and if there is a cause the error, you would be able to go back and recalculate everything to see where you went wrong! So yes, I do agree with FASB method.