Posted: March 13th, 2023

What are the major advantages of the indirect method of reporting cash flows from operating activities?

The indirect method of reporting cash flows from operating activities is used when preparing financial statements, and it has several advantages that make it a popular choice. The most important benefits of the indirect method are accuracy, transparency, comparability to other organizations’ financials, and ease of use (Selto et al., 2016).

Accuracy is one of the greatest benefits of using the indirect method because it provides an accurate picture of how much cash was generated or expended by an organization during a specified period. When a company uses this accounting technique to record its transactions for a given period, accountants can easily identify sources and uses of cash without any ambiguity or confusion about where the money came from or went (Selto et al., 2016). This helps stakeholders gain confidence in their understanding of the company’s finances since they can trust that all data reflects reality accurately.

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Another advantage to using this approach is transparency since it allows users to follow each transaction until they have accounted for all changes in net assets over time. For example, when recording sales on credit instead of collecting immediately upon purchase, businesses will note receivables rather than cash inflows – but those payments do not become part of net income until they are actually collected. Thus stakeholders can trace every item back to its source (Selto et al., 2016). Additionally, transactions involving unrelated companies such as investments or loans are clearly distinguished so investors can easily understand what business decisions drove economic performance during a particular period.

What are the major advantages of the indirect method of reporting cash flows from operating activities?

The indirect method also enables comparison across industries because financial reports reflect similar information regardless if the organization produces services or tangible goods (Selto et al., 2016). This consistency makes analysis easier for both external stakeholders looking at multiple organizations at once and internal managers trying to compare past performance with current results. Furthermore, comparability among industry peers gives analysts greater insights into sector trends compared with analyzing individual companies in isolation.

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Finally, one more benefit to using the indirect method is ease-of-use due to standardized formats used consistently throughout different industries (Siu & Killeen 2019). Companies report their operating activities according to Generally Accepted Accounting Principles which means no special adjustments need be made if switching between reporting methods; this helps reduce administrative costs associated with creating financial statements while still providing accurate information about liquidity levels within the organization which promotes better decision making by management teams since they have access up-to-date facts and figures before making key choices related to operations or strategy implementation.

In conclusion then there are many advantages associated with employing an indirect approach for reporting cash flow from operating activities including accuracy promoting trustworthiness among stakeholders; transparent illustration allowing tracking down all transactions; improved comparability among different industry players thus facilitating analysis; uniformity simplifying transitions between firms plus reducing costs; plus overall convenience contributing towards enhanced managerial decision making processes. All these factors combined result in this being a very popular choice preferred amongst accountants today despite other alternatives being available on hand too \cite{seltoretal2016},\cite{siukilleen2019}.

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