Which of the following methods of cash flows are favored by companies?

Question: Which of the following methods of cash flows are favored by companies?

Cash flow is a measure of how much money a company has available to spend on its operations and investments. There are different methods of calculating cash flow, and each one can have a different impact on how a company's financial performance is perceived by investors, creditors, and other stakeholders. In this blog post, we will compare and contrast two of the most common methods of cash flow: the direct method and the indirect method.

The direct method of cash flow starts with the cash receipts and payments from the company's operating activities, such as sales, purchases, wages, taxes, and interest. This method shows the actual cash inflows and outflows of the company, without any adjustments for non-cash items such as depreciation, amortization, or changes in working capital. The direct method of cash flow is favored by companies that want to present a clear and transparent picture of their cash generation and usage.

The indirect method of cash flow starts with the net income from the income statement and then adjusts it for non-cash items and changes in working capital. This method shows how the net income is converted into cash flow from operating activities, by adding back non-cash expenses such as depreciation and amortization, and subtracting or adding changes in current assets and liabilities such as accounts receivable, inventory, accounts payable, and accrued expenses. The indirect method of cash flow is favored by companies that want to highlight the relationship between their profitability and their cash flow.