Question

What is the role of accounting in business, and what are the major advantages of the indirect method of reporting cash flows from operating activities?

Answer 1

The Role of Accounting in business:

If a business is started then it is difficult to know that how the company is doing? Is it making a profits?.

To know the answer of these question and to provide the financial information to various stakeholders accounting is used. The manager always needs the accounting data to make decisions. In accounting process many reports are being prepared and the accountant uses these reports for effective decision making.

The accounting can be classified in two parts

a) Management reporting:

This type of reporting helps the management to run the business.

b) Financial reporting:

In this type of report it is found out that how the business is running.

Importance of Accounting

i) It provides the managers with various reports which help them to make important decisions.

ii) It keeps the track of income and expenditure of the company.

iii) It helps in ensuring various statutory compliances.

Various reports which are prepared in accounting are:

i) Balance Sheet

ii) Profit and loss

iii) Cash Flow Statement

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

a) This method is used to simplify the operations to various stakeholder.

b) In case of indirect method there is a link between income statement and balance sheet. The movement of current assets and current liabilities can be tracked by seeing the cash flow statement.

c) If indirect method is used various non cash transactions like depreciation are added back. This gives a complete picture to the users of the financial statement that how a non cash item which is included in income is not affecting the cash flow of the company.

d) In case of indirect method the company discloses only current liability and current assets, so the statement look simplified as compared to direct method.

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