IAS (International Accounting Standard) 7 Statement of Cash Flows recommends the “direct” and “indirect” methods of presenting the Operating Cash Flow section of Cash Flows Statement. Explain, with examples, the difference between the two methods, including the layout of each.
The fundamental difference between the indirect and the direct methods involved in the cash flow are their operating activities within the first section of the cash flow statements. In other words, the direct method involves the flows from operating activities that includes lines of actions including cash paid to suppliers and cash obtained from customers (Rasheed and Yoshikawa, 2012. Pg. 75). On the other hand, the indirect method usually shows the net income which is then adjusted to the needed total net income of the operating activities cash amount. Notably, nearly all the corporate organizations usually prepare their cash flow statements using the indirect method as is in the cases of Sony and Toshiba.
In terms of total asserts Toshiba and Sony are worth 5,873,903.0 t 14,206,292 yen respectively as per the 2013 financial year and the same translates to their working capitals respectively (Toshiba Corp 2014. Pg. 01).