Direct and Indirect Cash Flow in Business Management

(According to "What Is The Difference Between The Direct Method And The Indirect Method For The Statement Of Cash Flows?" (2004-2014), the main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections). Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers.

In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities. The direct method must also provide a reconciliation of net income to the cash provided by operating activities. This is done automatically under the indirect method.

Nearly all corporations prepare the statement of cash flows using the indirect method. The reason for financial accounting standards board allows both methods are simple.

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Both statements of cash flow preparation methods are allowable under basic accounting standards. “The Financial Accounting Standards Board, however, prefers the direct method for the statement of cash flows. FASB prefers the method because business stakeholders find the statement easier to read than the indirect statement of cash flows. Companies prefer the indirect method as it is easier to prepare since the financial information is already at hand.

Companies can include disclosures with either the direct or indirect statement of cash flows. These disclosures can detail any non-cash financing and investing activities.

FASB often requires disclosures with the statement of cash flows. Companies can prepare a secondary statement noting any significant non-cash activities for stakeholders” ("Direct Vs. Indirect Cash Flow Method", 1999-2014).

References

1. What is the difference between the direct method and the indirect method for the statement of cash flows? (2004-2014). Retrieved from http://www.accountingcoach.com
2. Direct vs. Indirect Cash Flow Method. (1999-2014). Retrieved from http://www.ehow.com