Chapter 5-23 Discussion - 1 What is the purpose of...

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1. What is the purpose of statement of cash flow? What is the objective of FASB 95. The cash flow statement reflects a firm's liquidity. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. The noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reported in footnotes. The cash flow statement is intended to: 1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances 2. provide additional information for evaluating changes in assets, liabilities and equity 3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods 4. indicate the amount, timing and probability of future cash flows The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets. 2. Why FASB prefers the direct method and why companies prefer the indirect method? FASB made the decision to encourage, but not require, the use of the direct method for reporting. Both the direct and indirect methods require cash flows to be classified according to operating, investing, and financing activities. The different presentation affects the operating section only. The investing and financing sections do not differ between the two presentations. The direct method also referred to as the income statement method, reports major classes of operating cash receipts and payments. In this respect, it is more consistent with the objective of SFAS 95. Supporters of the direct method contend that it is more revealing of a company’s ability to generate sufficient cash from operations to pay debts, reinvest in operations, and make distributions to owners. Detractors point out that many corporate providers of
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This note was uploaded on 12/13/2009 for the course ACCOUNTING ACC 100 A taught by Professor A during the Fall '09 term at University of Phoenix.

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Chapter 5-23 Discussion - 1 What is the purpose of...

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