Fast Track to Direct Cash Flow Reporting

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Even though good reasons abound for using the direct method of reporting operating cash flow, almost all managers choose the indirect method. We, and others whose opinions we respect, consider the direct method to be far superior to the indirect because it generates information that's more useful to the capital markets for assessing the amounts, timing, and uncertainty of a company's future cash flows. Contrary to today's conventional wisdom, the direct method isn't hard to apply. In fact, with the system modifications described in this article, it will be easy to provide the information financial statement users want. After applying these techniques, your financial statements will go beyond merely complying with minimum GAAP to satisfy recommendations offered by the Financial Accounting Standards Board (FASB) and the Association for Investment Management and Research (AIMR) for the cash flow statement. The result will be better-informed investors, creditors, and managers — with the ultimate consequence of lower capital costs and higher stock prices.

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