When we talk about cash flows, the words of ‘direct’ and ‘indirect’ are often spoken. Yes, the first and only requirement for the statement of cash flows is that real cash had to move, but there are two ways of showing the movement. With this post we’ll cover the ‘direct’ method. The direct showing of cash flows is something that is more widely used since it has a fairly easier concept as opposed to ‘indirect’.

The cash flows from investing and financing activities are always presented using the direct method meaning that they are not changes of certain balances but real proceeds or charges from certain activities. This in a nutshell is what the direct method really is – an actual cash movement from an activity. A company bought a truck and as a result the price paid is the ‘direct’ cash outflow. If another truck was sold, then the proceeds are ‘direct’ inflow of cash.

When the investing and financing activities are always presented using the direct method, for the operating cash flows the other method of presentation shows up – the ‘indirect’ one. One of the main pros for direct method is the fact that it’s simple. You paid 100; you also display an outflow of 100.

With this ‘pro’ in mind, note that cash flows from operating activities may be huge amounts displayed. As a result counting the in and out flows for all those operating activities may get you wrong somewhere. So there’s a ‘con’ for you just here. The ‘direct’ method requires that you display actual movements of cash meaning basically that the all the debits and credits on the bank account are all displayed on the statement of cash flows. Under ‘Operating activities’ the result may shows up huge amounts and compared to ‘indirect’ method, the analyzing factor is rather difficult, because it does not give you instant info of the balance sheet but more of the income statement. But we’ll come to this in our post about ‘indirect method’ in more detail.

Now, to summarize of what we just discussed, the ‘direct’ method of showing the cash flows means presenting actual cash movements for each activity. This is a simpler approach, however, not the only one.