Under both the direct and indirect method, the statement of cash flows contains three sections: Operating section, investing section, and the financing section. The operating section is the only section that is different between the direct and indirect method.
Direct Method – both U.S. GAAP and IFRS prefer that the operating section of the statement of cash flows be prepared under the direct method. Generally, the direct method will begin with the amount of all cash received from customers and subtract the amount of cash that has been used for operating expenses. Additional factors such as depreciation and amortization will be excluded when using the direct method.
Indirect method – most companies prefer the use of the indirect method. The indirect method is used more as a reconciliation of cash, and while the direct method begins with the amount of cash received from customers, the indirect method will begin with the company’s net income amount. The key difference is that net income will be adjusted for non-cash items such as depreciation and amortization. Additionally, the indirect method will add losses and subtract gains as they are non-operating amounts.
You might also be interested in... -
How do changes in prepaid expenses impact cash flow?
When the prepaid expense balance increases, that means the company has a cash outflow for expenses that have not yet been recognized in the income statement. An example that you might see on the CPA exam might indicate that if the company prepays rent for 12 months, the prepaid rent balance will increase for the...
-
How does a change in accrued liabilities impact cash flow?
When accrued liabilities increase, that means that the company recognized the expense in the income statement but has not actually paid cash for those expenses yet. Therefore, an increase in accrued liabilities (and really any liability) results in a cash inflow, while a decrease in accrued liabilities results in a cash outflow.
-
How is deferred revenue reflected on the cash flow statement?
Deferred revenue, also referred to as unearned revenue, is a liability (current or non-current) that is recorded when the company receives cash from customers but is not yet able to recognize the revenue. The cash flow impact from changes in deferred revenue is reflected in the operation section of the cash flow statement. When deferred...
How do changes in prepaid expenses impact cash flow?
When the prepaid expense balance increases, that means the company has a cash outflow for expenses that have not yet been recognized in the income statement. An example that you might see on the CPA exam might indicate that if the company prepays rent for 12 months, the prepaid rent balance will increase for the...
How does a change in accrued liabilities impact cash flow?
When accrued liabilities increase, that means that the company recognized the expense in the income statement but has not actually paid cash for those expenses yet. Therefore, an increase in accrued liabilities (and really any liability) results in a cash inflow, while a decrease in accrued liabilities results in a cash outflow.
How is deferred revenue reflected on the cash flow statement?
Deferred revenue, also referred to as unearned revenue, is a liability (current or non-current) that is recorded when the company receives cash from customers but is not yet able to recognize the revenue. The cash flow impact from changes in deferred revenue is reflected in the operation section of the cash flow statement. When deferred...
