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Very Few Companies Use The Direct Method For Disclosing Their Cash Flows From Operating Activities.
The direct method for disclosing cash flows from operating activities is a simple method where operating cash flows are presented as a list of cash flows. However, this method is rarely used, as the indirect method is more common. FASB has indicated a preference for the direct method, but reporting companies have continued to use the more traditional indirect method.
The indirect method starts with net income and adjusts it for changes in non-cash items such as depreciation and amortization. It then adjusts for changes in working capital accounts such as accounts receivable and accounts payable.
The direct method is more accurate than the indirect method because it shows the actual cash inflows and outflows from operating activities. However, it is more difficult and time-consuming to prepare than the indirect method.
According to a study by Deloitte, only 15% of companies use the direct method for disclosing their cash flows from operating activities. The study also found that companies that use the direct method tend to be larger and more profitable than those that use the indirect method.
One reason why companies may prefer the indirect method is that it requires less detailed information about cash inflows and outflows. This can be beneficial for companies that have complex operations or multiple business segments.
Another reason why companies may prefer the indirect method is that it is less costly to prepare than the direct method. The indirect method requires less detailed information about cash inflows and outflows, which can save time and money.
In conclusion, while the direct method is more accurate than the indirect method for disclosing cash flows from operating activities, it is rarely used by companies. Companies tend to prefer the indirect method because it requires less detailed information and is less costly to prepare.
Here are some websites that discuss Very Few Companies Use The Direct Method For Disclosing Their Cash Flows From Operating Activities.:
– https://corporatefinanceinstitute.com/resources/accounting/statement-of-cash-flows/
– https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/statement-of-cash-flows/preparing-the-statement-direct-method
– https://www.indeed.com/career-advice/career-development/what-is-direct-method-cash-flow
– https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/understanding-cash-flow-statements
– https://www.chegg.com/homework-help/questions-and-answers/true-false-companies-use-direct-method-disclosing-cash-flows-operating-activities-q116443230
