Final answer:
In compiling the Statement of Cash Flows (SOCF), both the direct method and indirect method are valid, with the direct method providing detailed cash flow information, while the indirect method is easier to prepare. Companies using the direct method must also present the indirect method reconciliation according to FASB standards. The choice depends on informational needs and company preferences.
Step-by-step explanation:
When putting together the Statement of Cash Flows (SOCF), both the direct method and the indirect method are considered acceptable and useful, but each has its advantages and disadvantages. The direct method provides more detailed information about the cash flows from operating activities by listing major classes of gross cash receipts and payments. Therefore, it can be more insightful for users who wish to understand how cash is being generated from operations.
However, the indirect method is often considered easier and less costly to implement because it starts with net income and adjusts for changes in balance sheet items, thus providing a reconciliation of net income to cash provided by operating activities. This method is more commonly used in practice, especially in the United States.
Ultimately, the choice between the direct and indirect methods may depend on the user's informational needs and the company's preference. In accordance with the Financial Accounting Standards Board (FASB) Statement No. 95, companies that use the direct method must also provide a reconciliation of net income to cash provided by operating activities (which is essentially the indirect method), effectively resulting in the presentation of both methods.