When we look at the Statement of Cash Flows, it’s important to know the difference between the direct and indirect methods. Let’s make it simple!

The direct method shows cash flows from business activities by directly listing all the cash coming in and going out during a certain time.

This means you can see clear amounts like cash collected from customers and cash paid to suppliers.

With the direct method, you get a clear view of where cash comes from and where it goes. It’s detailed and can help people understand how cash is made and used.

Now, let’s talk about the indirect method. This method starts with the net income, which is like the profit of the company. Then, it makes adjustments for things that don’t involve actual cash, changes in debts, and other factors to find out the cash flows from business activities.

In simpler terms, the indirect method connects net income to cash from business activities by adding back non-cash costs (like depreciation) and considering changes in money owed and inventory.

Here are some key differences:

1. Presentation:

   • Direct Method: Lists cash transactions directly.
   • Indirect Method: Adjusts net income for non-cash items and changes in debt accounts.

2. Complexity:

   • Direct Method: Is simpler to understand but usually needs more detailed records of cash transactions.
   • Indirect Method: Might be easier to create using current financial statements, but doesn't offer as much detail on cash sources and uses.

3. Usage:

   • Direct Method: Not used as often because it can take more work.
   • Indirect Method: Many companies, especially larger ones, like this method because it’s easier and quicker.

In summary, choosing between the two methods often depends on the company’s rules and how much detail the stakeholders want. Both methods give important insights into cash flow.