Preparing the Statement of Cash Flow
The statement of cash flow is one of the most important financial statements that business owners will generate as they want to look at the performance of their company over a specific period. This statement comprises of three sets of activities, which are operating activities, investing activities and financing activities.
Typically, the accountants in an bookkeeping firm in Singapore would calculate the section of investing activities and financing activities in a similar way. However, when it comes to the calculation of cash flow from operating activities, the accountants (Also see How Do Accountants Carry Out the Accounting Process?) may use two different methods, which are the direct method and the indirect method.
The main difference between them is the cash flow in the operating activities. If the company uses the direct cash flow method, it needs to report the changes that have taken place in the cash payments and cash receipts in the section for operating activities. For a company that implements the indirect cash flow method, it should use its net income as the base before making adjustments required. This means that it should add and subtract the varying amounts so that it can change the sum of net income to the cash flow from operating activities.
To produce a cash flow (Also see 4 Rules for Managing Business Cash flow) statement by implementing the direct method, one should only include the cash the company has spent and received. For example, the money that the company has collected from its clients and the amounts that it has paid to its employees, supplier, taxes, and others. The direct method does not take non-cash transactions into account, and it only includes cash transactions.
If one uses the indirect method to generate a cash flow statement (Also see How to Manage Your Business Cash Flow), he should use the company’s net income as a base and make some adjustments on it. Some examples of adjustments are adding non-cash expenses such as depreciation and subtracting non-cash revenue, such as profit earned from the sale of scrap. Also, he needs to adjust between current assets and liabilities before he can produce the statement.
For a company that uses the direct method to prepare its cash flow statement, it should exclude non-cash transactions such as depreciation. Thus, this method can show the cash flow of the company accurately as it does not include other transactions that do not involve cash. On the other hand, by using the indirect method, the company should consider all the factors. This makes the cash flow statement produced to be less accurate as the company will make adjustments by using the net income as the base.