Direct vs Indirect Cash Flow Methods | Know the Top Differences!

In this video on Direct vs Indirect Cash Flow Methods, here we discuss key differences with infographics and comparison table.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐃𝐢𝐫𝐞𝐜𝐭 𝐌𝐞𝐭𝐡𝐨𝐝?
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Direct method uses only cash transactions, i.e. cash spent and cash received to generate the statement of cash flow.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐌𝐞𝐭𝐡𝐨𝐝?
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Indirect method uses net income as a base and adds non-cash expenses such as depreciation, deducts non-cash income such as scrap profit and net adjustments between current assets and liabilities to generate the overall cash flow statement.

𝐃𝐢𝐫𝐞𝐜𝐭 𝐯𝐬 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐌𝐞𝐭𝐡𝐨𝐝𝐬 𝐊𝐞𝐲 𝐃𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐜𝐞𝐬
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#1 - The Direct cash flow method records cash transactions separately and then generates cash flow statement. Whereas, indirect cash flow method ensures that net income is converted automatically in terms of cash flow.

#2 - The Direct cash flow method is more accurate as there are no adjustments here. Whereas, indirect cash flow method's accuracy is slightly lower as it uses adjustments.

#3 - In Direct cash flow method there is no need for preparation. Whereas, indirect cash flow method preparations are needed mainly when converting net income into cash flow statement