Have You Ever Seen the Direct Method Statement of Cash Flows?

The ASC 230 guidance for the statement of cash flows includes the following language in paragraph 230-10-45-25:

In reporting cash flows from operating activities, entities are encouraged to report major classes of gross cash receipts and gross cash payments and their arithmetic sum—the net cash flow from operating activities (the direct method). (Paragraphs 230-10-55-1 through 55-4 and paragraph 230-10-55-21, respectively, discuss and illustrate a method by which those major classes of gross operating cash receipts and payments generally may be determined indirectly.)

Although the direct method is the “preferred” method, very few companies present the direct method. The reasons behind use of the indirect method, where net income is reconciled to cash from operating activities, generally go back to system issues and information availability.  (And, if a company uses the direct method they are still required to present indirect method information.)

Erie Indemnity, a very unique company that provides service to an “insurance exchange” has a robust approach to reporting and a 10-K filled with good examples.  One of the most interesting examples is that they use the direct method when presenting their statement of cash flows, one of very few companies that use this method.

You can find their annual report here, and the statement of cash flows is on page 45.

As always, your thoughts and comments are welcome!

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