The ways we report cash flow in finance can be done in two main methods: direct and indirect. These methods are important because they help show how a company manages its cash and operates effectively. This information is useful for different people, like investors and creditors.

Direct Method:

• The direct method shows the actual cash that comes in and goes out for business activities.
• It gives a clear view of cash inflows and outflows, making it easier for people, like investors, to see how much cash the company has on hand.
• Companies can use this method for cash budgeting. This helps them keep track of their cash and make better short-term financial plans.

Indirect Method:

• The indirect method starts with the company’s net income and then makes adjustments for cash transactions that don’t involve actual cash changing hands.
• Many people prefer this method because it’s simpler and matches up with how businesses usually keep their financial records.
• This method shows how net income relates to the net cash from business activities, helping analysts understand how profit turns into cash.

Both methods are important for businesses. For management, they help in analyzing cash flow and making predictions. For investors, knowing cash flows through both methods helps them determine how healthy a company is financially. Additionally, regulatory bodies find value in having clear reporting standards, no matter which method is used, making it easier to compare different companies.

In the end, whether to use the direct or indirect method will depend on what specific information the company and its users need.