Your friend, Tom Smith is the owner-president of a consulting company. He recently completed his third year of business and received the annual financial statements from his accountants. He finds the income statement and balance sheet informative, but does not understand the statement of cash flows. He said the section of operating activities is really confusing. He says this first section consists of a lot of additions and subtractions which did not make any sense.

Write memo to Tom including the following:

  • Explaining the purpose of the statement of cash flows.
  • Explaining the form and content of the statement of cash flows.
  • The advantages and disadvantages of the direct and indirect methods of preparing this financial statement.
  • Which method is preferred by the FASB?
  • Which method is more popular to use?