What is the key distinction between the direct and indirect methods of reporting cash flows from operating activities?

The direct method discloses gross cash receipts and payments, while the indirect method adjusts net profit for various factors.

AS-3 (Accounting Standard 3) recommends two methods for reporting cash flows from operating activities in a cash flow statement:
Direct Method: This method involves directly reporting the major classes of gross cash receipts and gross cash payments, such as cash received from customers and cash paid to suppliers. It provides a more detailed and transparent view of the company's cash flows from its core operations. However, it can be more complex to implement and may require additional effort to gather and present the necessary information.
Indirect Method: The indirect method starts with the net profit or loss before taxation and extraordinary items, which is taken from the company's income statement. It then adjusts this net profit or loss for various non-cash items, accruals, and other income or expenses associated with investing or financing activities. The goal is to arrive at the cash flows from operating activities indirectly by reconciling the net profit to cash flows. While this method is simpler to apply and is often used in practice, it may not provide as detailed a breakdown of cash receipts and payments as the direct method.