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 method | Direct method |
Present net result of receipt and payments | Present 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 flow | Provide more information, useful in estimating future operating cash flows |
Disclosure requirements