Direct and redirect methods

Both method 

  • Are permitted under US GAAP and IFRS 
  • Most firm use indirect method 
  • Representation of cash flows from investing and financing activities is exactly the same under both methods

Direct method (45)

  • Each line item of accrual-based income statement is converted into cash receipts or cash payments
  • Convert accrual-basis income statement into a cash-basis income statement

Indirect method (45)

  • Net income is converted to operating cash flow by adjustment for transactions that affect net income but are  not cash transactions, include
    • Non-cash expense (46) (depreciation, amortization)
    • Non-operating items (47) (gains and losses)
    • Change in balance sheets accounts result from accrual accounting events
Indirect methodDirect method
Present net result of receipt and paymentsPresent firm’s both operating cash receipt and payment
Focus on the difference between net income and operating cash flow, useful link to the net income statement when forecasting cash flowProvide more information, useful in estimating future operating cash flows

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