How to Prepare a Statement of Cash Flows?

The operating section of the statement of cash flows can be shown through either the direct method or the indirect method. With either method, the investing and financing sections are identical; the only difference is in the operating section. The direct method shows the major classes of gross cash receipts and gross cash payments. The indirect method, on the other hand, starts with the net income and adjusts the profit/loss by the effects of the transactions. In the end, cash flows from the operating section will give the same result whether under the direct or indirect approach, however, the presentation will differ.

The International Accounting Standards Board (IASB) favors the direct method of reporting because it provides more useful information than the indirect method. However, it is believed that greater than 90% of companies use the indirect method.

Direct Method vs Indirect Method of Presentation
There are two methods of producing a statement of cash flows, the direct method, and the indirect method.

In the direct method, all individual instances of cash that is received or paid out are tallied up and the total is the resulting cash flow. In the indirect method, the accounting line items such as net income, depreciation, etc. are used to arrive at cash flow. In financial modeling, the cash flow statement is always produced via the indirect method.