direct method
Suppose a friend asks how much cash your snack stall actually handled this month. The plainest way to answer is to list it directly: 'I took in 5,000 from customers, paid 2,000 to my suppliers, paid 800 in wages, and paid 200 in taxes — so I ended up 2,000 ahead in cash.' You name each real stream of cash coming in and going out. That straightforward listing is exactly what the direct method does for the operating section of a cash flow statement.
Under the direct method, the operating activities section is built by reporting the major classes of actual cash receipts and cash payments: cash collected from customers, cash paid to suppliers, cash paid to employees, cash paid for interest, and cash paid for taxes. Add the receipts and subtract the payments and you arrive at net cash from operations. It does not start from net income; it goes straight to the cash flows themselves, which is why it reads so intuitively — it looks like a simple cash in / cash out summary.
Standard-setters (both FASB and IASB) actually prefer the direct method because it is clearer to a non-accountant. In practice, though, most companies use the indirect method instead, because the direct method requires digging cash figures out of records that are kept on an accrual basis, which is more work. The two methods always produce the exact same total for operating cash flow; they differ only in how they present it.
Direct-method operating section: Cash collected from customers 480,000, minus cash paid to suppliers 200,000, minus cash paid to employees 150,000, minus interest paid 20,000, minus taxes paid 40,000 = net operating cash 70,000.
Real cash streams listed one by one — easy to read, harder to compile.
Even companies that use the direct method are often required to also provide a reconciliation of net income to operating cash flow, so the indirect-method information rarely disappears entirely.