What are the advantages of Indirect Method of Preparation of Cash-flow Statement?

It gives a direct reconciliation of the cash flows from operating activities, that is, from it, the various sources of operating cash as well as areas of application are directly shown.

It is self explanatory, unlike the direct method.

1. Advantages of preparation Cash flow statement under indirect method include following:
2. 1) Reconciled Cash Income

   • The indirect method of cash flows reconciles the accrual-based accounting net income with the actual cash flows from operating activities, showing how it may be different between a company's stated profitability and its cash holding position. Net income often includes revenues from sales on credit without cash actually collected from customers, resulting in a better income number but without contributing more to cash flows. Net income also takes into account of any non-cash expenses that reduce net income as reported but don't affect cash flows as they currently stand.

   2) Linked Financial Statements

   • The indirect method of preparing cash-flow statement requires the establishment of a direct link between the income statement and the balance sheet, which helps statement users to have a more systematic view about a company's financial statements. Many of a company's current assets and current liabilities shown on the balance sheet can be traced back to the company's operating activities summarized in the income statement. For example, an increase in the current asset of accounts receivable or the current liability of accounts payable also increases a related revenue or expense in the income statement.

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   3) Disclosed Non-cash Transactions

   • The disclosure of non-cash transactions when using the indirect method helps statement users better understand how non-cash transactions are factors of net income but not sources of cash flows. For example, when a non-cash expense, such as depreciation expense, is added back to net income to produce a seemingly higher cash-flow number, the depreciation expense has not become a source of cash flows. The non-cash depreciation expense did not have a decreasing effect on cash flows when initially deducted for net income, and therefore, it must be added back to net income to maintain its zero impact on cash flows.

   4) Simplified Statement Format

   • The alternative method to the indirect method of cash flows is the direct method that straightly reports all cash receipts and cash payments from operating activities. When using the direct method, companies are required to disclose separately cash receipts and cash payments with detailed subcategories, which can make the statement to appear too clustered. Accounting rule-setting authorities also requires companies that use the direct method provide an additional reconciliation schedule on net income and cash flows. On the other hand, companies are allowed to use the indirect method alone by disclosing only changes in current assets and liabilities in a simpler statement format.

Most people say that indirect method is difficult as compared to Direct method. The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. 

In direct method must also provide a reconciliation of net income to the cash provided by operating activities while this is done automatically under the indirect method.

Using the indirect method, the cash flows from operations processed by starting profits and losses of the company and then this figure is adjusted to the following items: 

1 items that do not require spending or use of cash: Examples of such expenses items: - depreciation, amortization expenses, allowances, corporate profits undistributed subsidiary and the minority's share of the net profit of the company. 

2 change during the period in inventory balances, accounts receivable, prepaid expenses, accounts payable and accrued expenses. 

3 other items that affected the result of the realization of the company and originated from the activities of investment or financing .omthal on these items gain or loss on sale of fixed assets. 

In preparing the statement of cash flows should show interest paid in cash and cash tax paid separately and are often classified as cash flows from operations. 

It is worth mentioning here, that the net cash flows from operating activities should be equal in all ways direct and indirect, instead of modifying the profit or loss of the company to change the terms of working capital in total by the indirect method, it is the analysis of profits to its terms of revenue and expenses and modify each of them to change the terms of working capital on its own all the way alone direct 

Advantages 

* - Describes the reasons flows 

* - Show all items 

* - Give the same result as the direct method

Indirect method, the cash flows from operations processed by starting profits and losses of the company and then this figure is adjusted to the following items: 1 items that do not require spending or use of cash: Examples of such expenses items: - depreciation, amortization expenses, allowances, corporate profits undistributed subsidiary and the minority's share of the net profit of the company. 2 change during the period in inventory balances, accounts receivable, prepaid expenses, accounts payable and accrued expenses. 3 other items that affected the result of the realization of the company and originated from the activities of investment or financing. An example of these items are gains or losses on sale of fixed assets. In preparing the statement of cash flows should show interest paid in cash and cash tax paid separately and are often classified as cash flows from operations.