[Anonymous]

I have been doing a lot of questions on statement of cash flow questions, and honestly I can’t tell the difference between the direct and indirect methods. I am just wondering, does it really matter which method is used when reconciling cash flow, and what is the actual difference between the two methods?

[Anonymous]

It absolutely matters. A lot of questions will ask you to use one or the other.

Remember that the difference only affects how the Operating Section is presented. Both will get to the same number but they are done very differently. Most MCQ will ask you to use one or the other to pull out a piece of the puzzle. They'll ask you what the change in cash is as a result of Accounts Receivable as an example.

My best advice, and I know you're running out of time, just practice doing a bunch of Statements of Cash Flows. They're actually not that bad but they take practice. Do a few and you'll get the hang of them. It will be worth your while on test day. I'm pretty sure that you'll at least have a couple MCQ on the exam. And it wouldn't surprise me to hear that you got a Sim on them too.

[jus10miami]

The indirect method starts with Net Income and reconciles cash from that in the Operating section. The direct method basically just states cash in and cash out without the reconciliation. The indirect method ties together the financial statements more clearly while the direct method is more cut and dry with cash. As in your grandmother could look at it and understand how they arrived at ending cash.

[Author]

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