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Financial statements - Direct method

While the direct method is preferred most companies use the indirect method due to the time it would take to complete the direct method. For my place of employment I can only begin to think how we would arrive at the information we would need for the direct method without a lot of work. On top of that if the direct method is used companies are still required to include the reconciliation between net income and operating cash flow. Therefore it would be very time consuming and costly from the perspective of man hours to report using the direct method.

For what reasons do you believe the direct method is more useful to financial statement users? Any reasons it would be less useful?

Solution Preview

Neither is "more" useful - the two methods are both helpful, but in different ways. The ultimate is both - a direct method presentation and a footnote showing the reconciliation (which is basically the indirect method). Of course, as you mention, this is an amazing amount of work and so firms usually report the indirect method (required either on the face of the statement or in the footnote) and leave off ...

Solution Summary

Your response is 230 words and discusses what the direct method tells you that is useful and what the indirect method tells you that is also needed. Neither is "more" useful - they are both helpful, but in different ways.

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