BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 16, Problem 1DQ
Textbook Problem

What is the principal advantage and the principal disadvantage of the direct method of reporting cash flows from operating activities?

Expert Solution
To determine

Determine the advantage and disadvantage of the direct method of reporting cash flows from operating activities.

Explanation of Solution

Statement of cash flows: It is one of the financial statement, that shows the inflow and outflow of cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Direct method: This method uses only cash basis for preparing the cash flows statement. In this method non-cash items like depreciation are not considered for preparing statement of cash flows.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.  In this direct method, cash flow from operating activities is determined by using all cash receipts and cash payments during the year.

Cash Receipts: It encompasses all the cash receipts from sale of goods and account receivables.

Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Direct method)
 
Add: Cash receipts.
         Cash receipt from customer
 
Less: Cash payments:
To supplier
For operating expenses
Income tax expenses
Net cash provided from or used by operating activities

Advantages and disadvantages of the direct method of reporting cash flows from operating activities are as below:

Advantages:

  • The main advantage of direct method is that it provides the accurate picture of the cash flows for its users. The users relies more on the statement of cash flows prepared under direct method.
  • Because of its simplicity and accuracy, the direct method of preparing the statement of cash flows is preferred, and endorsed by the accounting standards setting organizations.

Disadvantages:

  • The main disadvantage is that the cash receipts and cash payments data’s might not be readily available in the accounting records.
  • This method (direct method) not frequently prepared or used in practice as it does not provide the complete picture of cash flows by disregarding the noncash items.
  • The required data to calculate operating activities section will be an expensive one and it is a time –consuming process particularly for a big business with multiple sections or branches.

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Chapter 16 Solutions

Accounting
Show all chapter solutions
Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Adjustments to net incomeindirect method Ripley...Ch. 16 - Adjustments to net incomeindirect method Ya Wen...Ch. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Cash received from customersdirect method Sales...Ch. 16 - Cash received from customersdirect method Sales...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Free cash flow McMahon Inc. reported the following...Ch. 16 - Free cash flow Dillin Inc. reported the following...Ch. 16 - Cash flows from operating activities On its income...Ch. 16 - Effect of transactions on cash flows State the...Ch. 16 - Classifying cash flows Identify the type of cash...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting land transactions on statement of cash...Ch. 16 - Reporting stockholders equity items on statement...Ch. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Determining net income from net cash flow from...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash paid for merchandise purchases The cost of...Ch. 16 - Determining selected amounts for cash flows from...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Free cash flow Sweeter Enterprises Inc. has cash...Ch. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to PR...Ch. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Communication Tidewater Inc., a retailer, provided...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...

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