- The direct method of reporting cash flow is easier for accountants to compute, as it does not require any complex calculations. This method is straightforward: The accountant lists the business's total operating revenue and subtracts operating expenses to get a net operating income. The accountant does the same thing with financing and investing revenue and expenses. Conversely, the indirect method requires accountants to adjust net income for revenue and expenses that do not produce movement, so the accountant must perform several calculations.
- The direct method summarizes expenses -- for example, it lists the total amount of money paid for utilities in the office space rather than listing each utilities expense. Thus, the report is not cluttered with extraneous details, making it easier for investors and business owners to follow. The lack of details also reduces the risk that people will be confused regarding where money is going when they read the financial statement.
- Singapore Management University (SMU) states the direct method of cash flow may lead to better predictions of whether a business will succeed or fail than the indirect method does. Analysts can easily see whether a business is making sound financial decisions by examining its cash flow statements if it uses the direct method and thus make accurate predictions. However, SMU states that there is not enough empirical evidence to prove absolutely that the direct method leads to better predictions.
- The direct method generally is easier to implement and clearer for analysts to understand. However, this method can be more expensive than the indirect method because the accountant must keep track of more expenses and revenue. In addition, the indirect method shows changes in working capital and provides information about cash flow in periods other than the one covered in the report, which the direct method does not.
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