1. A fellow student says to you: \"The statement of cash flows is the easiest of
ID: 2504396 • Letter: 1
Question
1. A fellow student says to you: "The statement of cash flows is the easiest of the basic financial statements to prepare because you know the answer before you start. You compare the beginning and ending balances in cash on the balance sheet and compute the net inflow or outflow of cash. What could be easier?" Do you agree? Explain your answer.
2. Which method for preparing the Operating Activities section of the statement of cash flows, the direct or the indirect method, do you believe provides more information to users of the statement? Explain your answer.
Explanation / Answer
1. A cash flow is a statement that reflects the movement of cash both in and out over any period of time. Undoubtedly its easier to check whether the balances reconcile or not. However it cannot be said to be the easiest one, though the answer is in front of you because not always does the reconciliation seem to be correct. And anyways, the purpose of cash flow is control over cash and not presentation to anyone.
2. The direct method is more useful because there is actual bifurcation of operating inflows and outflows unlike indirect method where the starting point the operating income that does not give an insight clearly.
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