Question

Review the discussion and discuss whether you agree or disagree with the content and give an example of the direct method:

The main difference between indirect and direct cash flow methods is the decision to report all the details or sum them up into one step. Indirect method relies more on accrual accounting which can offer ease of set-up and update opportunities. However, indirect method lacks in offering “a clear picture of cash flows throughout a business” Direct cash flow method offers the clear picture that indirect method lacks. While this method offers more clarity it does fail to keep updates to the document from being easy to adjust.

Both methods offer three subjects by which to evaluate the business: operating, financing, and investing. This helps maintain consistency when attempting to reconcile either method. The best advantage a method can offer is clarity in any given situation which is why I favor the direct method of cash flows. It brings the opportunity to have a clear examination of how the business is operating and what changes, if any need to be made. Prior to taking this class my understanding of business was limited to product movement, operational costs, and sales revenue. Now that I’ve had time to further study the subject I’ve realized that without a high level of detail it would be impossible to understand exactly what the next step needs to be.

The direct method may be more cumbersome, but the specificity it gives outweighs the cost of time input to understanding the exact path of cash flow. It does take more time to update and maintain, but it offers “a reconciliation of net income to the cash provided by operating activities”. In my mind the indirect method may be better to have on hand to evaluate the overall performance at a glance, but to truly understand the inner workings of the business the direct method is my preferred option of accounting strategy.

Answer 1

Yes, I agree with the statement that to understand the inner working of the business, direct method is more preferred but in general cases, company's follows Indirect methods because the requirement of Indirect method matches with our accounting principle i.e. accrual basis. Even practically, gathering the data for direct method is a very cumborsome job for any company. So I don't say that direct method is superior because results from both the methods would be same but for depth analysis of business cash flows, direct method would be more useful.