difference between the ‘direct cash flow method’ and ‘indirect’

If you wonder what is the difference between the ‘direct cash flow method’ and ‘indirect’? Read carefully the following article where we will talk about one of the many types of reports that are used in business management accounting.

Direct flow method

The objective of the direct method is to analyze cash transactions, taking into account the results of the business cash interactions. This method takes into account all the factors involved in the box.

To use this method it is necessary to analyze all the factors of the box, thinning them and evaluating them. Therefore, aspects such as income based on sales, interest, payments made by the establishment, employee payments, various taxes and in general terms all cash movements are evaluated .

The direct is deeply methodical and certainly gives very detailed information regarding all operations. It is the preferred method for those who want to know all the aspects of cash flow that influence the value of the investment , but it can be cumbersome in the long run.

Indirect method

Unlike the direct method, the indirect method will not provide information at such a deep level. In any case, in practice it is much easier to apply , which is why it is usually preferred by many managers.

Regarding the development plan, the indirect method only takes into account the balance sheet and the so-called income statement. Based on these two factors the development will be established to achieve an adequate summary of the cash flow of an establishment.

Being explicit, the indirect method will take into account the general balance of the establishment in a period usually comprised of two years. In the case of the income statement, the values ​​included in the last year of operation will be taken into account. Clearly there are variants in terms of operability, but it is generally handled this way.

The objective is to arrive at a correct operating cash flow, for which the net income from the income statement is taken into account in the aforementioned time. Clearly many times it is necessary to make certain adjustments , so the balance sheet is also considered.

Accurate results are usually obtained, but without falling into the cumbersome that the direct method can be, being a balance that understands the importance of balance sheets in a business . As we mentioned before, these “advantages” make it the most used method by most businesses today.

What is the difference between the ‘direct cash flow method’ and ‘indirect’?

Having analyzed in general terms what the direct cash flow method is and what the indirect method is about, we can reach certain conclusions. In the first place, the direct method takes into account the various types of collections and expenses that the company has made in a given period, thus giving a fairly complete result.

On the other hand, the indirect method takes into account only the total movements of a specific period. In other words, the indirect method takes into account the basic elements of an accounting information system and seeks to give a general summary without falling into more concrete or specific specifications.

Certainly both methods have their utility, in any case, they depend explicitly on what you are looking for . The indirect method is usually more than sufficient if you want to reach a general consensus, while the direct method is especially useful to evaluate specific aspects of business finances.

 

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