When the company uses the indirect method to prepare the statement of cash flows, a decrease in the inventory account should be reported as; "A decrease in cash flows from operating activities".
What is indirect method for preparing cash flow?
The statement of cash flows for the indirect method starts with net income or loss and then adds or subtracts from that amount non-cash revenue and expense elements to arrive at cash flow from operating activities.
The use of indirect method of cash flows:
- Due to the fact that accrual accounting offers a more accurate representation of the ebbs and flows of business activity, the majority of organizations choose to record the cash flow statement using the indirect method.
- The indirect method also shows to be less complicated in terms of reporting.
The advantages of indirect cash flow is-
- The ability to reconcile net income and cash flows is one of the primary benefits of the indirect method of cash flows.
- The indirect technique is a straightforward way to create the statement of cash flows and aids users of financial statements in understanding the various connections between financial statements.
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