Just for comparative purposes, let’s take one last look at Rumble Corp.’s statement of cash flows under both the direct and indirect methods.
First, the direct method:
| Description | Amount | Total |
|---|---|---|
| In millions | ||
| Subcategory, Cash flows from operating activities | ||
| Cash receipts from customers | $ 45,800 | |
| Cash paid to suppliers | (29,800) | |
| Cash paid to employees | (11,200) | |
| Cash generated from operations | Single Line 4,800 |
|
| Interest paid | (310) | |
| Income taxes paid | (1,700) | |
| Net cash from operating activities | Single Line | Single Line $2,790 |
| Subcategory, Cash flows from investing activities | ||
| Purchase of property, plant, and equipment | (580) | |
| Proceeds from sale of equipment | 150 | |
| Net cash used in investing activities | Single Line | Single Line (430) |
| Subcategory, Cash flows from financing activities | ||
| Proceeds from issuance of common stock | 1,000 | |
| Proceeds from issuance of long-term debt | 500 | |
| Dividends paid | (460) | |
| Net cash used in financing activities | Single Line | Single Line 1,040 |
| Net increase in cash and cash equivalents | 3,400 | |
| Cash and cash equivalents at beginning of period | 1,640 | |
| Cash and cash equivalents at end of period | Single Line $5,040 Double Line |
|
| Reconciliation of net income to net cash provided by operating activities: | ||
| Net income | $ 2,610 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Depreciation and amortization | 125 | |
| Decrease in Accounts Receivable | 15 | |
| Gain on sale of equipment | (90) | |
| Increase in Accounts Payable | 32 | |
| Increase in income taxes payable | 80 | |
| Increase in other liabilities | 18 | |
| Total adjustments | 180 | |
| Net cash from operating activities | Single Line | Single Line $2,790 |
Next, the indirect method:
| Description | Amount | Total |
|---|---|---|
| In millions | ||
| Subcategory, Cash flows from operating activities | ||
| Net income | $ 2,610 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Depreciation and amortization | 125 | |
| Decrease in Accounts Receivable | 15 | |
| Gain on sale of equipment | (90) | |
| Increase in Accounts Payable | 32 | |
| Increase in income taxes payable | 80 | |
| Increase in other liabilities | 18 | |
| Total adjustments | 180 | |
| Net cash from operating activities | Single Line | Single Line $2,790 |
| Subcategory, Cash flows from investing activities | ||
| Purchase of property, plant, and equipment | (580) | |
| Proceeds from sale of equipment | 150 | |
| Net cash used in investing activities | Single Line | Single Line (430) |
| Proceeds from issuance of common stock | 1,000 | |
| Proceeds from issuance of long-term debt | 500 | |
| Dividends paid | (460) | |
| Net cash used in financing activities | Single Line | Single Line 1,040 |
| Net increase in cash and cash equivalents | 3,400 | |
| Cash and cash equivalents at beginning of period | 1,640 | |
| Cash and cash equivalents at end of period | Single Line $5,040 Double Line |
|
| Supplemental information: | ||
| Cash paid for interest | $ 310 | |
| Cash paid for income taxes | $ 1,700 | |
The only real difference is that the direct method reports cash flows from operations as if we’d been recording sales, purchases, and other expenses using the cash basis of accounting, which is the advantage of the direct method over the indirect method: the direct method shows operating cash receipts and payments.
The Statement of Financial Accounting Standards No. 95 encourages use of the direct method but permits use of the indirect method. Whenever given a choice between the indirect and direct methods in similar situations, accountants choose the indirect method almost exclusively. The American Institute of Certified Public Accountants reports that approximately 98% of all companies choose the indirect method of cash flows.
The reason is that the information in it is difficult to assemble; companies simply do not collect and store information in the manner required for this format. Using the direct method may require the chart of accounts to be restructured in order to collect different types of information. The indirect method, as you will see, can be more easily derived from existing accounting reports.