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Explain the difference between the direct and indirect methods of preparing a cash flow statement. Name...

Explain the difference between the direct and indirect methods of preparing a cash flow statement. Name two advantages and two disadvantages of each method

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Expert Solution

Difference between direct and Indirect method of Cash Flow:

The main difference between direct and indirect method is the calculation of operating activity. Direct method find the Cash flow operating activity by calculated cash received from customers and paid to suppliers ., which means it directly calculate the cash flow from the income statement.

Whereas indirect method uses the net income, which is further adjusted to the transaction which are needed for the calculation of the operating activity.

Advantage of Direct method of cash flow:

1. It provides a more accurate picture of the business because it includes all the transactions related to business.

2. It is more beneficial to the investors because they can easily judge the liquidity of the business.

Disadvantage of Direct method of cash flow:

1. If number of transactions is high, it requires more time and efficiency.

2. Since it shows the complete list of transaction, so competitors can have internal information of the business.

Advantage of Indirect method of cash flow:

1. It is easy to prepare in comparison to Direct cash flow statement.

2. It is self-explanatory.

Disadvantage of Indirect method of cash flow:

1. It does not provide the clear and detailed picture as in case of direct method of cash flow.

2. Since Indirect method of cash flow is not supported by IFRS many organisations may not follow it.

ekkarill92 answered 2 years ago
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