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B. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items.The main difference between the direct and indirect methods of calculating cash flows is the way that cash flow from operations is calculated. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with income after taxes and adjusts backwards for noncash and other items. Both methods will have the same result for operating cash flows. The direct and indirect method calculates the financing and investing cash flows the same way, and both methods will result in the same cash flow figure.
while using direct method we uses cash flow in the operations section of cash flow statement.cash flow due to operations arises from customers collections,cash paid to suppliers,employees and others.
while in the indirect method,we adjust net income to convert it from an accrual to a cash basis.to add back non-cash expenses such as depreciation,loss provisions for account receivables,and any loosses of fixed assets.we also need to adjust net income for changes between the starting and ending account balance in cuurent aset except cash and current liabilities of that period.
this is the main difference between calculating cash flow from operation by direct and indirect method.
When using the direct method, you list cash flows in the operations section of the cash flow statement. Cash flows due to operations arise from customer collections and cash paid to suppliers, employees and others. The section also reports cash paid for income tax and interest. The problem in trying to use the direct method is that a company might not keep the information in the required form. For example, companies using accrual accounting lump together cash and credit sales -- they would have to make special provision to track cash sales separately.
In the indirect method, you adjust net income to convert it from an accrual to a cash basis. This requires you to add back non-cash expenses such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a fixed asset. You also adjust net income for changes between the starting and ending account balances in current assets -- excluding cash -- and current liabilities for the period. These accounts include accounts receivable, inventory, supplies, prepaid assets, payable liabilities and unearned revenues.
There are many differences in this regard.
direct csalculation is depending on actual amounts of sales and expenditures. but the indirect calculations is depending on expectation based on 14 & 90 days plan.
The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)
Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.
The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)
Nearly all corporations prepare the statement of cash flows using the indirect method.
