Other Cash-Flow Formats
November 27, 2008 – 12:01 pmIn addition to the cash-adjusted income statement represented by the UCA (Uniform Credit Analysis®) cash-flow-statement format, there are two other generally accepted patterns. Both have been defined by the American Institute of CPAs (AICPA) and balance, as does the UCA format, to the actual change in cash during the period. The AICPA’s Financial Accounting Standards Board’s (FASB) two alternative cash-flow statement formats are presented in the boxes on pages 56 and 57 as the playfully descriptive Direct and Indirect methods. Each format begins with cash flow from operating activities, moves through to cash from investing activities and finally to cash from financing activities. The direct method begins at cash from operating activities starting with cash from sales, whereas the indirect method begins with net income. The direct method has the advantage of being a better parallel with the actual operational flow of the business. The indirect method is preferred by some because of its more traditional approach that is rooted in a well-established accounting rule of thumb for cash-flow estimation, whereby net income and depreciation (as well as any other expenses that have no direct cash implications) are added together. In both the direct and indirect methods, there is a line called cash from operating activities, which is generally identical to what is called net cash income on the UCA cash-flow format. When this operating cash-flow number is reduced by capital expenditures, the result is referred to as free cash flow. That term is worth noting for its content value as well as because it is one of the few reasonably well accepted terms in the field of cash-flow analysis; it is essentially identical to cash after debt amortization from the UCA cash-flow format.
