Statement of Cash Flows: Direct or Indirect Method

When taking over a forensic accounting engagement, the accountant must be certain he or she knows how to provide information about cash receipts and cash disbursements of an entity during a period. The statement of cash flows is one of the main financial statements. Its link to the other financial statements sheds light to investors, creditors, employees, governmental agencies about the ability of an organization to generate positive future cash flows, to meet its obligations when they become due, to pay dividends, and its need for external financing.

In preparing a statement of cash flows the forensic accountant must identify the major classifications of cash flows, know the difference between net cash flows from operating activities and net income, and be able to identify the contrast between the direct and indirect method of calculating net cash flow from operating activities.