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Direct method and indirect method for reporting cash flows

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Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

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The solution compares and contrasts the direct method and indirect method for reporting cash flows

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Two general methods are available for reporting cash flows generated or consumed by operations, the direct method and the indirect method. The direct method reports cash inflows of cash, e.g., from sales, and cash outflows for payment of expenses, e.g., purchases of inventory. The indirect method which begins with the net income number, a mixture of cash (e.g., cash proceeds from sales ) and non-cash components (e.g., depreciation) and (1) removes non-cash or accrual items, then (2) adjusts for the cash effects of transactions not yet reflected in the income statement (e.g., cash payments for inventory not yet sold).

However, only the direct method reports actual sources and ...

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