The direct method tends
to be more comprehensive in terms of providing values for operational
cash flow activities. It is, however, more difficult to construct, as
some companies do not collect information at this level of detail.
Additionally, the direct method attempts to reconcile the differences
between the income statement and the cash flow statement created by cash
vs. accrual accounting
The indirect method
focuses on differences rather than the reconciliation between the income
statement and cash flow from operations. To clarify, the direct method
focuses on reconciliation, which tends to be more detailed and require
more information -- it is more like a mathematical proof than an
accounting of cash flows. The indirect method focuses on highlighting
differences and therefore requires less detail. From a practical
perspective, the direct method costs more to produce and maintain than
the indirect method, which is why it is used less.
Because the direct method results in a more easily understood report,
but most people end up using the indirect method because under FAS 95 if
you use the direct method you need to provide supplemental information
that's similar to the indirect method so it's twice as much work.
i prefer indirect method because starts it with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn’t affected cash.
To compute net cash flows from operating activities, noncash changes in
the income statement are added back to net income, and net cash credits
Aug 14th, 2014
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