Stunning Difference Between Direct And Indirect Cash Flow Statement

Direct Cash Flow Method.

Difference between direct and indirect cash flow statement. The direct method and the indirect method are alternative ways to present information in an organizations statement of cash flows. There are no presentation differences between the methods in the other two sections of the statement which are the cash flows from investing activities and cash flows. For both methods the goal is to determine a companys net cash flow.

Direct and indirect methods are different only to the extent of the calculation of cash flows from operating activities cash flows from investing and financing activities are calculated in the same manner. Nearly all the companiesentities prepare Statement of Cash Flow using indirect. Unlike the direct approach the net profit or loss from the Income Statement is adjusted for the effect of non-cash transactions.

With the direct method of cash flow you count only the money that actually leaves or enters your business during the designated reporting period. The key difference between direct and indirect cash flow method is that direct cash flow method lists all the major operating cash receipts and payments for the accounting year by source whereas indirect cash flow method adjusts net income for the changes in balance sheet accounts to calculate the cash flow from operating activities. Read carefully the following article where we will talk about one of the many types of reports that are used in business management accounting.

Lets explain it more thoroughly. If you wonder what is the difference between the direct cash flow method and indirect. In reality the only difference between direct and indirect cash flow resides in how the operating activities are calculated as illustrated in this graphic.

Only difference between Direct and Indirect method is under Operating Activities There are NO differences while reporting activities under Investing Activities and Financing Activities sections of both the methods. The objective of the direct method is to analyze cash transactions taking into account the results of the business cash interactions. Direct and indirect are the two different methods used for the preparation of the cash flow statement of the companies with the main difference relates to the cash flows from the operating activities where in case of direct cash flow method changes in the cash receipts and the cash payments are reported in cash flows from the operating activities section whereas in case of indirect cash flow.

Operating section investing section and the financing sectionThe operating section is the only section that is different between the direct and indirect method. The difference however only applies to the operating cash flow. The main difference between the direct and indirect cash flow statement is that in direct method the operating activities generally report cash payments and cash receipts happening across the business whereas for the indirect method of cash flow statement asset changes and liabilities changes are adjusted to the net income to derive cash flow from the operating activities.