Recently, attention to the assessment and treatment of functional disability has increased notably. It is widely understood that impairments in everyday living skills, including independent living skills, social functions, vocational functioning, and self-care, are present in people with schizophrenia. It has also become clear recently that assessment of these skills can pose substantial challenges. These challenges include selection of meaningful short-term outcome measures and avoiding bias and reduced validity in the data. Self-report, direct observation, and informant reports of everyday disability all have certain advantages but appear to be inferior to direct assessment of skills with performance-based measures. This review outlines the issues associated with the assessment of functional skills and everyday functioning and provides a description of the strengths and weaknesses of these approaches. We conclude that direct assessment of functional capacity has substantial advantages over other measures and may actually provide a more direct and valid estimate of functional disability than performance on the more distal neuropsychological assessment measures.