What is the Cash Flow Statement Direct Method?

The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. Items that typically do so include:

Cash collected from customers
Interest and dividends received
Cash paid to employees
Cash paid to suppliers
Interest paid
Income taxes paid

The advantage of the direct method over the indirect method is that it reveals operating cash receipts and payments.

Disadvantages of the Cash Flow Statement Direct Method

The standard-setting bodies encourage the use of the direct method, but it is rarely used for the following reasons:

Data collection difficulty. The information required for the direct method is difficult to assemble; companies simply do not collect and store information in the manner required for this format. Instead, they use the indirect method, which can be more easily derived from existing accounting reports.
Restructuring cost. Using the direct method may require that the chart of accounts be restructured in order to collect different types of information.
Comparison effort. If the chart of accounts is restructured to accommodate the data collection required for the direct method, the reporting entity will somehow have to manually devise the direct method reporting for any prior comparison periods included in its financial statements, which could be quite difficult.