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The indirect method of presentation is very popular, because the information required for it is relatively easily assembled from the accounts that a business normally maintains in its chart of accounts. The indirect method is less favored by the standard-setting bodies, since it does not give a clear view of how cash flows through a business.
The indirect method uses readily available information and most companies find it easier to employ. Management and shareholders might fret if a company consistently reports net income exceeding cash flows -- they will want to identify the sources of non-cash income and determine whether these are masking serious problems with the business. If you believe that “cash is king,” you will look to the cash flow statement to measure the company’s liquidity -- the ability to pay bills and avoid defaulting on debt. Cash shortages can lead to bankruptcy, whereas excess cash might indicate a need to take steps such as increasing investments, paying down debt, increasing executive salaries or distributing dividends.
