From the course: A Guide to Understanding Financial Statements

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Direct cash flows vs. indirect cash flows

Direct cash flows vs. indirect cash flows

From the course: A Guide to Understanding Financial Statements

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Direct cash flows vs. indirect cash flows

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- [Instructor] Like we spoke about earlier, the statement of Cash Flows can be prepared under two separate methods, the Direct Method and the Indirect Method. Let's go over how exactly each of those works starting with the Direct Method. The Direct Method showcases the cash movements related to specific activities on your statement of Cash Flows such as cash received from customers or cash paid to employees. It generally looks like this. As you can see, this is very easy to understand. You can see how much cash you collected specifically from your customers. How much cash you paid specifically to the suppliers and employees, and all sorts of other pieces of information in plain English. That's probably the biggest reason why it's so popular. It's really easy to understand. At the same time, there are challenges involved with the direct method of Cash Flows, and that is it's very difficult to produce. The general idea is that you need information outside of what you can find on your…

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