Arguments in Favor of Direct and Indirect Methods of Cash Flow

The primary advantage of the direct method is that it presents the firm's operating cash receipts and payments, while the indirect method only presents the net result of these receipts and payments. Therefore, the direct method provides more information than the indirect method. This knowledge of past receipts and payments is useful in estimating future operating cash flows.

The main advantage of the indirect method is that it focuses on the differences in net income and operating Cash flow. This provides a useful link to the income statement when forecasting future operating cash flow. Analysts forecast net income and then derive operating cash flow by adjusting net income for the differences between accrual accounting and the cash basis of accounting.

Disclosure requirements
Under U.S. GAAP, a direct method presentation must also disclose the adjustments necessary to reconcile net income to cash flow from operating activities. This disclosure is the same information that is presented in an indirect method cash flow statement. This reconciliation is not required under IFRS.

Under IFRS, payments for interest and taxes must be disclosed separately in the cash flow statement under either method (direct or indirect). Under U.S. GAAP, payments for interest and taxes can be reported in the cash flow statement or disclosed in the footnotes.