The key difference between the direct and indirect methods to make a statement for cash flows resides in reporting the cash flows from operating activity. This section is the first point of the statement for cash flows. Upon using the direct method, this section will comprise calculations for different cash values: customers’ cash, the cash expenses on the supply, etc. Contrary to that, upon using the indirect methods, this section will illustrate the net income that is accompanied by the relevant adjustments required for the conversion of the final net income into the amount of cash retrieved from the operating activities (Mulford & Comiskey, 2005).
In addition, upon using the direct method, an accountant is likewise obliged to present the correlation between the net income and the cash from the operating activities, whereas, in the framework of the indirect method, this task is performed automatically. Therefore, the indirect method is generally preferred by companies due to its simplicity in comparison to the direct method.
Cash Flows from Operating Activities
and Cash Flows from Investing Activities
While preparing a statement of cash flows, it is essential to distinguish between cash flows from operating activities and cash flows from investing activities. Thus, the cash flow from operating activities (CFO) value shows the amount of money that a company receives from its regular activities. Such activities might include a service provision, goods manufacturing and other ongoing tasks. The CFO value comprises the earnings before interest, though it does not comprise the costs of investments. The CFO value might be calculated in the following way: earnings before interest plus depreciation minus taxes (Mulford & Comiskey, 2005).
The cash flow from investing activities value, in its turn, reflects the transformations in the firm’s cash. This transformation might occur due to the gains that the firm receives from its investments and the operating subsidiaries. The indicated change can be either positive or negative; it is essential to check this value for different quarters to perform a consistent evaluation of a company’s progress.
The Statement of Cash Flows and the Income Statement
The statement of cash flows and the income statement measure different aspects of a company’s financial performance. The statement of cash flows is mainly aimed at determining the key cash sources and evaluating the use of cash for a specific period. Hence, it illustrates the exact amount of money a company received and spent at a particular point. A financial analyst can evaluate a company’s capacity to pay the vendors and bills.
The income statement, in its turn, evaluates the company’s financial performance in general – it measures its revenues, losses and profit for a specific period. The income statement is commonly prepared once a month in order to determine the character of a company’s financial performance (Mulford & Comiskey, 2005). The income statement includes the net profit section that is further used to assess the CFO for the statement of cash flows.
Comparing the Statement of Cash Flows and the Income Statement
It would be irrational to state that one of the statements is better than the other. Each statement has a particular function. Hence, in case the main task resides in analyzing the cash management for a fixed period, it is essential to examine the statement of cash flow. This statement will also provide a hint at the company’s short-term viability, so it is of particular importance to potential partners and creditors. In case the key objective is to evaluate the company’s general loss or profit, it is necessary to analyze its income statement. In addition, the information represented in both statements is used to compose a company’s balance sheet.
The Cash Flow Statements of Apple and Samsung
While comparing the two statements of cash flows, it is, first and foremost, essential to realize how the main values are calculated. Hence, the key value represented in the Apple’s and Samsung’s statements of cash flows is the net cash from operating activities. This value is calculated with the help of the following formula:
Non-cash expenses + non-operating losses – non-operating gains + decrease in current assets – increase in current assets + increase in current liabilities – decrease in current liabilities = Net cash flow from operating activities.
Comparing the two statements, it might be seen that Apple’s net cash flow from operating activities for 2015 makes 81 million dollars (Stock Analysis on Net, 2016). This value is twice larger than that showed in Samsung’s statement where the net cash flow from operating activities for 2015 makes only 35 million dollars (Samsung, 2016). It can be explained by the fact that Apple has had a significant increase in the liabilities. It should be pointed out that the gap is equally significant in other sectors. Hence, for instance, the net cash used in financing activities reported in the Apple’s statement makes 56 million dollars what prevails the value presented by Samsung by 24 million dollars. In the meantime, it is essential to note that Apple increased its cash flows significantly in 2015; in case the compared values referred to the period of 2014 or 2013, the gap would be less prominent.
Mulford, C.W., & Comiskey, E.E. (2005). Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance. Hoboken, New Jersey: John Wiley & Sons.
Samsung. (2016). Interim consolidated statements of cash flows. Web.
Stock Analysis on Net. (2016). Web.