Principles of Accounting Volume 1: Financial Accounting
at UniversityPractice Mode
Explain the Purpose of the Statement of Cash Flows
Cash Flow Statement Reporting
US generally accepted accounting principles (GAAP) has codified how cash flow statements are to be presented to users of financial statements. This was codified in Topic 230: Statement of Cash Flows as part of US GAAP. Accountants in the United States should follow US GAAP. Accountants working internationally must report in accordance with International Accounting Standard (IAS) 7 Statement of Cash Flows. The ethical accountant understands the users of a company’s financial statement and properly prepares a Statement of Cash Flow. There is often more than one way that financial statements can be presented, such as US GAAP and International Financial Reporting Standards (IFRS). What if a company under US GAAP showed reporting issues on their financial statements and switched to IFRS where results looked better. Is this proper? Does this occur?
Approaches to Preparing the Statement of Cash Flows
The statement of cash flows can be prepared using the indirect approach or the direct approach. The indirect method approach reconciles net income to cash flows by subtracting noncash expenses and adjusting for changes in current assets and liabilities, which reflects timing differences between accrual-based net income and cash flows. A noncash expense is an expense that reduces net income but is not associated with a cash flow; the most common example is depreciation expense. The direct method lists net cash flows from revenue and expenses, whereby accrual basis revenue and expenses are converted to cash basis collections and payments. Because the vast majority of financial statements are presented using the indirect method, the indirect approach will be demonstrated within the chapter, and the direct method will be demonstrated in Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method.