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1. What is the main reason that the Direct Cash Flow Statement is recommended when building a financial model?
The control account method required refers to cash receipts and cash payments – which are supported by the direct format only
Given the indirect method refers partially to the Income Statement, if errors are made in the Income Statement, a balancing “correcting” error may occur in the Cash Flow Statement which may go unnoticed
There are less line items in a direct presentation, so there is less to model
2. In the Indirect Cash Flow Statement, a reconciliation is performed between the Income Statement and Operating Cash Flows. Certain items are added back (e.g. Interest Expense, Tax Expense) and then variants are deducted (e.g. Interest Paid, Tax Paid). What is the primary reason why depreciation is added back but then no corresponding deduction is made?
Depreciation is a non-cash item
The cash equivalent of depreciation is purchases of capital expenditure, which is already included in Investing Cash Flows. Depreciation is not only added back because it is a non-cash item; it is also a double-count
It is included in movements in working capital
3. To calculate movements in working capital, which of the following approaches will not calculate the correct values?
Summing up the movements in the corresponding control accounts
Calculate the movement in Net Assets from one period to another
Calculating the movement in accounts receivable, accounts payable and inventory from one period to the next in the Balance Sheet
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