Direct method is not without its drawbacks. It requires a careful track of cash transactions, which is time-consuming for companies with many sources of revenue or expense. This approach can also fail to accurately represent changes in working cash if the investments made are non-cash items like inventory.
Indirect method: The indirect approach starts with the net income in the income statements and adjusts it for non-cash items such as depreciation, amortization etc. that are accrued or deducted during the time period. This method is less labor-intensive than the direct approach, as it does not require the same amount of manual work to track individual transactions.
However, since only adjustments related to non-cash items are taken into consideration there may still be some discrepancies between actual results reported using this method versus what would’ve been seen under the direct approach. To make matters worse, without the ability to see all of the details behind certain decisions it may be hard for stakeholders to grasp why they were made. This could cause confusion about performance metrics.