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Information about cash flows can influence decision makers in many ways For example if a companys regular operations bring in more cash than it uses investors will value the company higher than if property and equipment must be sold to finance operations Information about cash flow can help creditors decide whether a company will have enough cash to pay its debts as they mature Management and investors use cash flow information to evaluate a companys ability to meet unexpected obligations Cash flow information is also used to evaluate companys ability to take advantage of new business opportunities that may arise In November 1987 the FASB issued Statement of Financial Accounting Standards statement of cash flow This standard requires businesses to include a statement of cash flow in all financial reports that contain both a balance sheet and an income statement The primary purpose of this statement is to present information about a companys cash receipts and disbursements during the reporting period Direct Method of Presenting Cash Flow from Operating Activities When you prepare a statement of cash flow the net cash provided by operating activities can be calculated two different ways One is called Direct Method the other is Indirect Method When the direct method is used you separately list each major class of operating cash receipts and each major class of cash payments Then the payments are subtracted from the receipts to determine the net cash provided by operating activities The FASB encourage companies to use direct methodIndirect Method of Presenting Cash Flow from Operating Activities The indirect method is not as informative as direct method because it does not disclose the individual cash inflows and outflows from operating activities Instead the direct method discloses only the net cash provided by operating activities When the indirect method is used the net income is listed first Then
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