What is the direct method of cash flow reporting?

The direct method of cash flow reporting involves recording all cash transactions, including cash inflows and outflows for the year. This method provides a clear picture of how cash is generated and used during the reporting period by detailing cash receipts from customers and cash payments to suppliers and employees. By using the direct method, companies can clearly show the actual movement of cash into and out of the business rather than relying on adjustments from net income, which could include non-cash items.

In contrast, other methods might not provide as straightforward a view of cash flow. For instance, summarizing cash flow by major categories could miss specific details about individual cash transactions. Focusing solely on operating cash flow limits the scope, as cash flows related to investing and financing activities are equally important in assessing overall financial health. Estimating cash transactions from net income typically refers to the indirect method, which involves starting with net income and adjusting for non-cash transactions, making it less direct in terms of actual cash flow reporting. Thus, option B accurately describes the direct method.