What is FASB preferred method of statement of cash flow reporting?

What is FASB preferred method of statement of cash flow reporting?

• A. Indirect method
• B. Both methods are equally preferred
• C. Neither method is preferred
• D. Direct method

Answer: (D)

FASB favors presenting the cash flows from operating activities using the direct method because it shows actual cash receipts and payments directly. In this method, the statement lists cash inflows and outflows by category—cash collected from customers, cash paid to suppliers, cash paid to employees, cash paid for taxes, and so on. This format gives a clearer, more intuitive view of where cash is coming from and where it’s going, making it easier to assess liquidity and the company’s ability to generate cash from operations. An alternative approach, the indirect method, starts with net income and then adjusts for noncash items and changes in working capital to arrive at cash from operating activities. While both methods are acceptable under US GAAP, the direct method is considered preferable by FASB because of its greater transparency into actual cash movements.

FASB favors presenting the cash flows from operating activities using the direct method because it shows actual cash receipts and payments directly. In this method, the statement lists cash inflows and outflows by category—cash collected from customers, cash paid to suppliers, cash paid to employees, cash paid for taxes, and so on. This format gives a clearer, more intuitive view of where cash is coming from and where it’s going, making it easier to assess liquidity and the company’s ability to generate cash from operations.

An alternative approach, the indirect method, starts with net income and then adjusts for noncash items and changes in working capital to arrive at cash from operating activities. While both methods are acceptable under US GAAP, the direct method is considered preferable by FASB because of its greater transparency into actual cash movements.