Please write a 250 response to the below discussion and please include 2 scholarly sources.
There are many advantages and disadvantages of the indirect and direct method of preparing the income statement of cash flows. As a company itâs important to know which method better suites your line of business and which method is most accurate. The statement of cash flow is meant to predict future cash flows, evaluate management decisions, determine ability to pay dividends and interests, and shows the relationship of net income to cash flows. There are two ways this can be done, through the indirect method or the direct method.
The indirect method which is used by vast majority reconciles from net income to net cash provided by operating activities. Some advantages of this method includes; the information is more up to date and available, it show combined financial statements, reveals non-cash organizational transactions, and it is a industry standard that is used by most organizations.
The direct method which is used by a minority of companies reports all cash receipts and cash payments from operating activities. An advantage of the direct methods is that it reveals operating cash receipts and payments. A disadvantage to this method is although this method is easier the more transactions a company have the more complicated and time consuming this method gets. This is because each transaction is analyzed to decide whether it involved an actual transfer of cash.
If I had to choose between the two methods I would choose the indirect method because it is used more often, making it easier to compare and contrast amongst other companies if necessary.
Please write a 250 response to the below discussion and please include 2 scholarly sources.
There are many advantages and disadvantages of the indirect and direct method of preparing the income statement of cash flows. As a company itâs important to know which method better suites your line of business and which method is most accurate. The statement of cash flow is meant to predict future cash flows, evaluate management decisions, determine ability to pay dividends and interests, and shows the relationship of net income to cash flows. There are two ways this can be done, through the indirect method or the direct method.
The indirect method which is used by vast majority reconciles from net income to net cash provided by operating activities. Some advantages of this method includes; the information is more up to date and available, it show combined financial statements, reveals non-cash organizational transactions, and it is a industry standard that is used by most organizations.
The direct method which is used by a minority of companies reports all cash receipts and cash payments from operating activities. An advantage of the direct methods is that it reveals operating cash receipts and payments. A disadvantage to this method is although this method is easier the more transactions a company have the more complicated and time consuming this method gets. This is because each transaction is analyzed to decide whether it involved an actual transfer of cash.
If I had to choose between the two methods I would choose the indirect method because it is used more often, making it easier to compare and contrast amongst other companies if necessary.
Related questions
| P12-5 (Supplement B) Preparing a Statement of Cash Flows with Gain on Sale of Equipment (Indirect Method) LO12-2, 12-4, 12-6 | |||||
| XS Supply Company is developing its annual financial statements at December 31, 2014. The statements are complete except for the | |||||
| statement of cash flows. The completed comparative balance sheets and income statement are summarized: | |||||
| 2014 | 2013 | ||||
| Balance sheet at December 31 | |||||
| Cash | $ 34,000 | $ 29,000 | |||
| Accounts receivable | 35,000 | 28,000 | |||
| Merchandise inventory | 41,000 | 38,000 | |||
| Property and equipment | 121,000 | 100,000 | |||
| Less: Accumulated depreciation | (30,000) | (25,000) | |||
| $ 201,000 | $ 170,000 | ||||
| Accounts payable | $ 36,000 | $ 27,000 | |||
| Wages payable | 1,200 | 1,400 | |||
| Note payable, long-term | 38,000 | 44,000 | |||
| Contributed capital | 88,600 | 72,600 | |||
| Retained earnings | 37,200 | 25,000 | |||
| $ 201,000 | $ 170,000 | ||||
| Income statement for 2014 | |||||
| Sales | $ 120,000 | ||||
| Gain on sale of equipment | 1,000 | ||||
| Cost of goods sold | 70,000 | ||||
| Other expenses | 38,800 | ||||
| Net income | $ 12,200 | ||||
| Additional Data: | |||||
| a. | Bought equipment for cash, $31,000. | ||||
| Sold equipment with original cost of $10,000, accumulated depreciation of $7,000, for $4,000 cash. | |||||
| b. | Paid $6,000 on the long-term note payable. | ||||
| c. | Issued new shares of stock for $16,000 cash. | ||||
| d. | No dividends were declared or paid. | ||||
| e. | Other expenses included depreciation, $12,000; wages, $13,000; taxes, $6,000; and other, $7,800. | ||||
| f. | Accounts payable includes only inventory purchases made on credit. Because there are no liability accounts relating to taxes or other expenses, | ||||
| assume that these expenses were fully paid in cash. | |||||
| Required: | |||||
| 1 | Prepare the statement of cash flows for the year ended December 31, 2014, using the indirect method. | ||||
| (List cash outflows as negative amounts.) | |||||
| Possible input areas are shaded. | |||||
| XS SUPPLY COMPANY | |||||
| Statement of Cash Flows | |||||
| For the Year Ended December 31, 2014 | |||||
| Cash flows from operating activities: | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||
| - | |||||
| Net cash provided by operating activities | - | ||||
| Cash flows from investing activities: | |||||
| - | |||||
| Cash flows from financing activities: | |||||
| - | |||||
| $ - | |||||
The financial statement for urban outfitters for the fiscal year ending Jan 2012 can be found on google
| CP12-2 | Finding Financial Information | LO12-2, 12-4, 12-6 | ||||
| Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. | ||||||
| Required: | ||||||
| 1. Does Urban Outfitters use the direct or indirect method to report cash flows from operating activities? | ||||||
| 2. What amount of tax payments did the company make during the most recent reporting year? | ||||||
| (Hint: The statement of cash flows may be helpful to answer this question.) | ||||||
| 3. Explain why the âshare-based compensationâ and âdepreciation and amortizationâ items were added in | ||||||
| the reconciliation of net income to net cash provided by operating activities. | ||||||
| 4. Has the company paid cash dividends during the last three years? | ||||||
| How do you know? | ||||||
| 5. What was free cash flow for the year ended January 31, 2012? (Dollars in thousands.) | ||||||
| Cash Flows from | ||||||
| Free Cash Flow: | ||||||
