Answer to Question #264184 in Accounting for Lisa

Question

Explain, using examples, the difference between cash flow statements prepared using the

direct method versus the indirect method.

Answer 1

Solution:

Cash flow statements prepared using the direct method determine changes in cash receipts and payments, which are reported in the cash flow from the operations section. The direct method is more detailed about the operating section of the cash flow statement, although it is time-consuming.

Cash flow statements prepared using the indirect method take the net income generated in a period and add or subtract changes in the asset and liability accounts to determine the required cash flow. The indirect method is less complicated and easier to use compared to the direct method.