The direct method of preparing the statement of cash flows is easier to do than the indirect method.

Question: The direct method of preparing the statement of cash flows is easier to do than the indirect method.

If you are a business owner or an accountant, you may have to prepare a statement of cash flows for your company. This is a financial document that shows how cash is generated and used by your business during a specific period of time. There are two methods of preparing the statement of cash flows: the direct method and the indirect method. In this blog post, I will explain why the direct method is easier to do than the indirect method.

The direct method of preparing the statement of cash flows reports the actual cash receipts and payments of the business during the period. It shows the sources and uses of cash by operating, investing and financing activities. For example, it will show how much cash was received from customers, paid to suppliers, invested in equipment, borrowed from banks, etc. The direct method gives a clear and detailed picture of the cash flows of the business.

The indirect method of preparing the statement of cash flows starts with the net income from the income statement and adjusts it for non-cash items and changes in working capital. It shows the reconciliation between the net income and the net cash flow from operating activities. For example, it will add back depreciation expense, deduct increase in accounts receivable, add decrease in accounts payable, etc. The indirect method does not show the actual cash receipts and payments of the business, but rather the net effect of them on the income statement.

The direct method of preparing the statement of cash flows is easier to do than the indirect method for several reasons. First, it is more intuitive and straightforward to report the actual cash transactions of the business rather than adjusting the net income for non-cash items and changes in working capital. Second, it is more consistent and comparable with other financial statements, such as the balance sheet and the income statement, which also report the actual amounts of assets, liabilities, revenues and expenses. Third, it is more informative and useful for users of financial statements, such as investors, creditors and managers, who can see how cash is generated and used by different activities of the business.

Therefore, if you have to prepare a statement of cash flows for your company, I recommend using the direct method rather than the indirect method. It will save you time and effort, and provide you with a better understanding and analysis of your business's cash flows.

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