Statement Of Cash Flows Essay Samples
Direct vs. indirect methods
The two methods of preparing statement of cash flow differ only in the cash flows from operating activities’ section. The indirect method starts with the net profit as the base (Fasb.org, 2015). The net income is then adjusted for non-cash expenses and changes in working capital items. Decreases in operating assets other than cash and increases in current liabilities are added to the net income. The direct method does not use the net income as the base. It lists the actual cash receipts and payments. In addition, no adjustments are required for changes in working capital items from the previous year.
The direct method only includes cash transactions. Therefore, items such as depreciation, amortization expenses, among other items are omitted in the cash flow statement. The indirect method lists non-cash expenses and uses them to adjust the net income accordingly. The direct method is like an income statement prepared on a cash basis of accounting. The indirect method is like a partial conversion of an income statement prepared on the accrual basis into a cash basis income statement. Another difference is the treatment of gains and losses from the sale of non-trading assets. Sale of fixed assets is not an operating activity. The direct method omits gains or losses on the sale of fixed assets while the indirect method includes such in the cash flow statement.
The direct method lists the actual sources and uses of cash. The cash flow statement will show the actual cash spent on purchases, administrative expenses, selling expenses, and other operating expenses. It will also show the actual amount received from cash sales, from debtors and other operating activities. On the other hand, the indirect method does not show the actual sources and uses of cash. It only shows the net income that is adjusted to the cash basis of accounting (Icaew.com, 2015). It will only indicate the net cash flow from all operations without indicating the amount spent on individual operating activities.
Cash flows from operating activities vs. cash flows from investing activities
Cash flows from operating activities are those generated from an entity’s daily activities aimed at generating income. Operating activities relate to the core objective of the company such as manufacturing, production, distribution, selling and marketing the product or providing a service. They include sales, purchases, payment of selling and marketing expenses, administrative expenses and other daily operations. On the contrary, cash flows from investing activities are those generated from an entity’s sale and purchase of fixed assets, investments in securities of other companies, purchase of other subsidiaries, among other investing activities.
Cash flows from operating activities cannot be avoided so long as the business is operational. In most cases, these cash flows are evenly distributed throughout the accounting period. Cash flows from investing activities are not uniformly distributed (Abc-amega.com, 2015). This is because purchase and sale of fixed assets are not frequent activities. A business can avoid spending on investing activities, unlike operating activities.
Cash flow statement and the income statement
The cash flow statement shows the cash an entity obtains and uses for different activities during a given year. It gives the amount of money spent and received from investing, operating and financing activities in a given year (Iasplus.com, 2015). The statement also gives the net change in cash during the year and adds it to the cash balance at the beginning of the year to show the cash balance at the end of the year.
On the contrary, the income statement shows the net income earned during a year. It shows the revenues from all its activities as well as the expenses incurred in earning those incomes. The difference between the income statement and the statement of cash flows is that the income statement includes both non-cash and cash expenses. The statement of cash flows shows only cash expenses. Furthermore, the income statement includes only revenues and expenses from financing and investing activities. It does not include the expenditures or cash proceeds from these activities, unlike the cash flow statement. The operating activities section of the cash flow statement is the same as the income statement prepared using the cash basis of accounting.
Which of the statements is better?
It is, therefore, impossible to state which of the two statements is better. Both statements are necessary. In fact, the income statement is required in the preparation of the statement of cash flows using the indirect method. The indirect method needs the net income figures as well as the details of non-cash expenses as well as other adjustments such as losses and gains on the sale of fixed assets.
Difference between Apple’s and Samsung’s statements of cash flows
Both Apple and Samsung use the indirect method in preparing the statements of cash flows. Samsung’s net cash flows from operating activities increased from $35983 million in 2012 to $44260 million in 2013 while that of Apple increased from $50,856 million in 2012 to $53,666 million in 2013. Apple had a higher net cash flow from operating activities than Samsung in both 2012 and 2013. Its net income was also higher than that of Samsung.
Both companies had negative net cash flows from investing and financing activities. Samsung’s net cash flows from investing activities were $42,402 million in 2013, up from $29,680 million in 2012. Apple’s net cash used investing activities were $33,774 million in 2013, down from $48,227 million in 2012. This indicates that Samsung invested in long-term assets than Apple in 2013. Apple reduced the amount of cash used in investing activities while Samsung increased the net amount used in investing activities in 2013.
Samsung’s net cash used in financing activities in 2013 was $3920 million while that of Apple was $16379. Samsung’s cash balance at the end of year 2013 was $15431 million while that of Apple was $14,259 million. Samsung had a larger balance than that of Apple. This could be attributed to the large amount of cash Apple spent on financing activities.
The other difference is that Apple’s statement of cash flows gives total cash effect of changes in operating assets and liabilities. Details of the specific operating assets and liabilities are shown in the notes to the financial statements. On the other hand, Samsung gives the details operating asset and liability on the face of the cash flow statement.
Fasb.org,. (2015). Summary of Statement No. 95. Retrieved 15 April 2015, from http://www.fasb.org/summary/stsum95.shtml
Iasplus.com,. (2015). IAS 7 Statement of Cash Flows. Retrieved 15 April 2015, from http://www.iasplus.com/en-gb/standards/ias/ias7
Icaew.com,. (2015). IAS 7: Statement of cash flows | Accounting standards | Library | ICAEW. Retrieved 15 April 2015, from http://www.icaew.com/en/library/subject-gateways/accounting-standards/ifrs/ias-07
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