Sample Essay

The two methods of preparing cash flow statements may be used alternatively in various companies according to nature and management of the organisation. The indirect method of preparing cash flows includes the excess or shortage of revenues over expenses and the direct method includes the actual cash components of the revenue and expenses. This basic difference is only depicted in the cash flow from operations. The cash flow from operations in the direct method include the actual cash receipts and payments for the operations of the business whereas the indirect method starts with the net income to which adjustments are made to reconcile it with operating cash flows (Gross, McCarthy and Shelmon 2005).

Although the indirect method of preparing cash flow statements is used commonly in corporations due to ease in application some authors prefer the direct method for preparing the statement. Although the direct method for preparing a statement of cash flows is quite difficult and time consuming the preference is given by these authors as the direct method indicates the actual receipts and payments in the operations of a business and a true reflection of cash receipts and payments is presented which gives a clear and simple reflection of the actual cash transactions that have taken place during a particular period. A company can use direct and indirect method to prepare cash flows but it would be quite easier for users of the statement to interpret the cash flows if the direct method is used to prepare the statement (Epstein, Nach and Bragg 2008).

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