Question

Mr. Bunky Bunkers, President & CEO of Bunkers, Inc. argues that it does not matter which method (direct or indirect) is used in preparing a statement of cash flows. Afterwards, argues Mr. Bunkers, a statement of cash flows is a statement of cash flows. Do you agree with Mr. Bunkers? Explain in detail.

Answer 1

If the ultimate objective is to see only the net cash flow and cash flow from operations, investing activities or financing activities, there is no difference between indirect and direct method. Both will result in the same value. But, the difference occurs when the company wants to see the various heads under cash flow from operating activities.

Under direct method, the various cash flows are shown as occured like cash flow from customers, cash paid to various suppliers, employees etc. While in indirect cash flows, net income is there and then all the adjustments like depreciation are done to come to the final net cash flows. So, if the management wants to know how the company's net income translates to cash flows, the indirect cash flow method would be preferred, while if they separately wants to know where the cash is flowing and where it is coming from, the direct cash flow method would be preferred.