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What is the difference between the direct and indirect cash flow statement methods?

Under both the direct and indirect method, the statement of cash flows contains three sections: Operating section, investing section, and the financing section. The operating section is the only section that is different between the direct and indirect method.

Direct Method – both U.S. GAAP and IFRS prefer that the operating section of the statement of cash flows be prepared under the direct method. Generally, the direct method will begin with the amount of all cash received from customers and subtract the amount of cash that has been used for operating expenses. Additional factors such as depreciation and amortization will be excluded when using the direct method.

Indirect method – most companies prefer the use of the indirect method. The indirect method is used more as a reconciliation of cash, and while the direct method begins with the amount of cash received from customers, the indirect method will begin with the company’s net income amount. The key difference is that net income will be adjusted for non-cash items such as depreciation and amortization. Additionally, the indirect method will add losses and subtract gains as they are non-operating amounts.

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