Review of the Direct Method Statement of Cash Flows and the Associated Teaching Implications

Abstract

FAS 95 permits both the direct and indirect methods of reporting cash flow from operating activities on the statement of cash flows. The academic literature documents several benefits of the direct method. Nevertheless, use of the direct method is now virtually extinct in the U.S. The “indirect-direct” method of preparing the direct cash flow, used by current textbooks, makes the direct method appear more difficult to prepare than the indirect method. Several recommendations are provided to give students a more favorable opinion of the direct method, with the hope of increased U.S. acceptance and adoption.