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- Provides information about the entity's sources and uses of cash during an accounting period.
- The statement of cash flows can be presented in two different formats called the direct method and the
indirect method.
The direct method statement of cash flows is constructed at the end of an accounting period using the cash
account in the ledger. Cash is an asset account. Each debit to cash during the period is an increase in the
entity's cash balance (a source of cash) and each credit is a decrease (a use of cash). We simply classify
each debit and credit in the cash account as either an operating, investing or financing item and re-arrange
them into these three categories to obtain the direct method statement of cash flows.
The two statements differ in only one area: the format and information included in the cash flows from
operating activities section. The investing and financing cash flows sections are exactly the same in both
types of statements of cash flows.
Given the relative complexity of the operating section of an indirect method statement of cash flows, you
might wonder why do accountants use them at all? Answer: Because the operating section of the indirect
method statement explains the difference between the net income and the operating cash flows of the
period, it provides readers with information about the extent to which and the means by which the entity's
net income of the period has resulted in operating cash flows.
The Financial Accounting Standards Board requires entities that use the direct method in their statement
of cash flows to present a separate reconciliation of net income to operating cash flows using the indirect
method. As a result, most companies choose to present only the indirect method statement of cash flows.
Cash Management?
- Ensure enough cash is on hand to pay liabilities
- Make sure excess cash is used to maximize interest of the business
- Accurate tracking of cash for reports.
- Internal controls should be in place
Internal Controls?
- Ensure compliance
- Conduct risk assessment
- Engage in oversight
- Create paper trail
Types of Internal Controls?
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