Main Difference between Direct and Indirect Method of SCF

The main difference between the direct method and the indirect method of presenting the statement
of cash flows (SCF) involves the cash flows from operating activities. (There are no differences in the
cash flows from investing activities and/or the cash flows from financing activities.)
Under the U.S. reporting rules, a corporation has the option of using either the direct or the indirect
method. However, surveys indicate that nearly all large U.S. corporations use the indirect method.

Example of the Indirect Method of SCF

When the indirect method of presenting a corporation's cash flows from operating activities is used,
this section of SCF will begin with a corporation's net income. The net income is then followed by the
adjustments needed to convert the accrual accounting net income to the cash flows from operating
activities. A few of the typical adjustments are:
 Adding back depreciation expense
 Adding the decrease in accounts receivable
 Deducting the increase in inventory
 Deducting the decrease in accounts payable
 Adding the increase in accrued expenses payable
Example of the Direct Method of SCF
When the direct method of presenting a corporation's cash flows from operating activities is used, the
amount of net income is not the starting point. Instead, the direct method lists the cash
amounts received and paid by the corporation. Here are a few of the more common descriptions that
will be seen under the direct method:
 Cash from customers
 Cash paid to employees
 Cash paid to suppliers
 Cash paid for interest

Investing
Cash flow from investing activities is an item on the cash flow statement that
reports the aggregate change in a company's cash position resulting from
investment gains or losses and changes resulting from amounts spent on
investments in capital assets, such as plant and equipment.

Examples of investing activities include:

 cash payments to acquire property, plant, and equipment (PPE), other tangible or intangible
assets, and other long-term assets; and sale of such assets
 loans extended to other companies; and collection of such loans;