Teaching Operating Cash Flow: One Matrix for Analysis – Two Methods for Presentation

29 Pages Posted: 25 Oct 2017

See all articles by James Stice

James Stice

Brigham Young University

Earl Stice

Brigham Young University; Nazarbayev University

David Cottrell

Marriott School of Business

Derrald Stice

University of Hong Kong - Faculty of Business and Economics - Accounting Area

Date Written: October 24, 2017

Abstract

The operating activities section of the statement of cash flows presents a long-standing teaching challenge for accounting educators. The direct method is easy to understand yet difficult to prepare; the indirect method is harder to understand but easier to prepare. Many instructors address the two methods separately, requiring students to learn two different ways for preparing the operating section of a statement of cash flows. Because of this focus on the mechanics of preparation, the result is often an emphasis on how to prepare the cash flow statement rather than on the essential information the statement provides. In this paper, we note that both the direct and indirect methods begin at the same point, the income statement, and end at the same point, cash flow from operations. We then describe one process by which the income statement and the balance sheet can be analyzed so as to provide the information required to present operating cash flow using either the direct or the indirect method. Using this approach allows students to apply one intuitive process for computing cash flow from operations rather than memorizing two different sets of rules for the direct and indirect methods. This intuitive process makes the indirect method adjustments easier to understand and reduces the emphasis on rote mechanics.

Keywords: Cash Flow Pedagogy, Operating Cash Flow, Direct Method, Indirect Method

Suggested Citation

Stice, James and Stice, Earl and Cottrell, David and Stice, Derrald, Teaching Operating Cash Flow: One Matrix for Analysis – Two Methods for Presentation (October 24, 2017). Available at SSRN: https://ssrn.com/abstract=3058236 or http://dx.doi.org/10.2139/ssrn.3058236

James Stice

Brigham Young University ( email )

Provo, UT 84602
United States

Earl Stice (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States

Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

David Cottrell

Marriott School of Business ( email )

536 TNRB
Provo, UT 84602
United States
8014223268 (Phone)

Derrald Stice

University of Hong Kong - Faculty of Business and Economics - Accounting Area ( email )

Hong Kong, HK
China

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