Current GAAP permits two methods of calculating and reporting a company's net cash flow from operating activities on its statement of cash flows.
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Required:
?Identify the two methods. Which method does the FASB prefer? Which method do most companies use and why?
What will be an ideal response?
The two methods allowed for reporting cash flows from operating activities are the direct method and the indirect method. The direct method deducts cash outflows directly from the operating cash inflows to determine the net cash flow from operating activities. The indirect method begins with net income and adjusts net income for accruals and deferrals to arrive at net cash from operating activities.?In its current standard, the FASB expressed a preference for the direct method. Most companies, however, have used the indirect method. Prior to the current pronouncement, many companies already used the indirect method to report operating activities on the statement of changes in financial position. Companies continued that practice on the statement of cash flows. Further, the FASB also requires a company that does use the direct method to also include a schedule that reconciles net income to net cash from operating activities. Thus, a company that chooses the direct method must also disclose operating cash flows under the indirect method.?
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