Question

For the operating activities section of the statement of cash flow you can either use the direct method or the indirect method, please state in detail one difference between the two methods.

Answer 1

The only difference between the direct method of cash flow statement and indirect method of cash flow statement is of "cash flows from operating activities". There is no difference in cash flows from investing and financing activities.

Under the direct method, the cash flows from operating activities will include "cash collected from customers and cash paid to suppliers, cash paid for expenses, etc". where as, in the indirect method, it starts with the net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.

"Depreciation" finds a place in indirect method of cash flow statement as it is added to the net income because it is an non-cash expenses. But the same doesn't find a place in direct method of cash flow statement.