Direct and Indirect Cash Flows
Generally accepted accounting principles (GAAP) and the Financial Accounting Standards Board (FASB) state that the statement of cash flows can be presented in one of two ways: the direct method or the indirect method. The main difference between both of these presentations is more in the cash flows from operating activities section. This would be cash from operating activities such as manufacturing and shipping product, buying and selling merchandise, or even services rendered.
The direct method shows additional details, such as cash from clients/customers and cash paid to the suppliers of the business. It shows the cash flows through the activities during the accounting period. The indirect method shows the net income the company (including the items that do not affect cash) in addition to the adjustments during the accounting period. This method also includes depreciation, depletion, and amortization adjustments.
The Financial Accounting Standards board (FASB) allows both methods to present the statement of cash flows for a few reasons. The main reason is that the net cash flows would still have the same dollar amount. The stockholders/investors tend to lean toward the direct method, because it is said to be easier to read and understand. High cash income will satisfy the investors when it comes to reading the cash flow statement. Companies and their accountants prefer the indirect method because of the ease of use expressed. It is said that the financial information is on the balance sheet, so it is easier to prepare the statements.
Both presentations of the statements of cash flows show the same dollar amount, as far as the net cash flow (income earned or lost during the accounting period), there are simply differences in how the information is gathered and prepared. If granted the opportunity to work in the accounting industry, I would lean toward the indirect method. This would be mainly due to the ease of creating...