Compare and contrast the direct and indirect methods of cash flow. Which is used more widely and why?
There are two methods for preparing the cash flow statement - the direct method and the indirect method. Both methods yield the same result, but different procedures are used to arrive at the cash flows.
The Direct Method
Under the direct method, you are basically analyzing your cash and bank accounts to identify cash flows during the period. You could use a detailed general ledger report showing all the entries to the cash and bank accounts, or you could use the cash receipts and disbursements journals. You would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.
Another way to determine cash flows under the direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net cash effect for that particular line ...
This response looks at the direct and indirect methods of cash flow. It also discusses the uses of each method.