The difference between the direct and indirect cash flow methods lies in the accounting method: cash accounting vs. accrual accounting.
The direct method utilizes cash accounting, requiring the calculation of each cash transaction rather than relying on balance sheets and income statements to determine cash flow. The cash accounting method determines cash flow according to when cash is received.
The indirect method uses accrual accounting, meaning cash is tallied based on when it is earned rather than when it is received, and cash flow is determined by balance sheets and income statements.
Most businesses use the indirect method due to the fact that it is simpler and less time-consuming than the direct method.