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Can a company experience a net loss, but have positive cash flows? Provide an example of a scenario that might cause this. What are the differences between the direct and indirect presentation of cash flows? Why does the Financial Accounting Standards Board (FASB) allow both methods? Which does FASB prefer? Which do you prefer? Explain why.
Yes it is possible if the net loss is due to depreciation. For example a company has the following earnings
Earnings before depreciation 10000
Less depreciation -30000
Net loss -20000
When depreciation is added to net loss it will be net cash generated form operating activities as follows:
Net loss -20000
Add depreciation 30000
Net cash generated 10000
The difference in indirect method and direct method is under the cash generated form operating activities. The direct method show detail of cash receipts from customers and other sources and cash payments to suppliers and other sources, while under indirect method it starts from the net income instead of showing detail of cash receipts and cash payments. In net income the adjustments for non cash item and changes in working capital is mad to arrive at the figure of cash generated from operating activities.
AS the purpose is to show the cash inflows and outflows from each activities and it may be achieved by both methods therefore it is allowed to use both methods.
However it is preferred to make cash flow statement under direct method as it shows the detail of all receipts and payments as has been explained earlier.
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