Cash Flow Statement - Direct Method

The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. The direct method is a method of creating the cash flow statement in which actual cash flow information from the company's operations segment is used, instead of accrual accounting values.

The Cash Flow Statement (Direct Method)

One of the financial analysis that is vital for financial managers, in addition to other financial instruments are cash flow statement. The definition of this analysis is to find out how it will be use and how the needs of the funds will be spent. The cash flow analysis can be known from whom obtain and for what these funds are use. A report that describes where obtain and for what the Treasury use, as refer to as cash flow statement.

Cash flow statement the cash receipt reflects directly the entities are classify according to the primary sources. The payments of cash classify according to main user for one period. This report provides useful information on the activities of the entities in generating cash on his activities and on investing or sending cash.

Direct Method Reporting

In the Direct Method was report the gross cash receipts from operating activities. The cash outlay gross for the operation. The difference between cash receipts and spending cash from operating activities will be report as net cash flow from operating activities. In other words, the direct method to deduct expenses of operating cash receipts operating cash. The direct method of generating report receipt and presentation of the accounts payable in a nutshell.

In the Direct method of reporting cash flows also report net cash flow from investment operations as the main group of operating cash receipts (for example: cash receive from customers and cash receive from interest and dividends) and accounts payable (for example: cash paid to suppliers for goods, for services to employees, to the lender for interest and to government agencies for taxes).

The main advantage of this method is the direct method shows the report of receipt and expenditure of cash is more consistent with the objective of a cash flow statement. In addition, this direct method is easier to understand and provide more information in taking decisions.

By the method of direct information on major groups of gross cash receipts and gross cash expenditure can be obtain by:

1. the existence of record company accounting.


2. adjusts the sales, sales loads and other outposts in the income statement regarding:

2. Changes in inventories, receivables and Payable business during the period.


3. The post instead of other cash.


4. Other posts related to cash flows of investment and funding.

How to make the direct method cash flow statement cash flow statement whether it's trading companies or service companies is to systematically sort a list of outposts in the profit-loss report and calculate how much cash associate with each post.

Sales and cash received from customers.

Starting balance accounts receivable and sales efforts during the year gives rise to a potential Bill of customers. The final balance of the receivable accounts receivable-accounts receivable represent businesses that have not collectible. Then the cash receive from customers is calculate as follows:

Note that a faster way is to adjust the sales figures of $150 with $20 changes in the accounts receivable business. The question whether plus or minus with $20?. The increase in accounts receivable businesses means reducing cash. Then deduct from accounts receivable increase $20 $150 i.e. $150-$ 20 = $130.

Cost of goods sold and the cash paid for inventory.

The final balance of the total inventory and cost of goods sold during the year. Describes the total amount of the supplies had been purchase earlier by the company. Starting balance inventories purchase inventories describing in previous years. Then the supplies that were purchase this year can be calculate as follows:

Alternatively, adjust it cost of goods sold $80 with $25 changes in inventories. What is plus or minus with $25?.  A decrease in the amount of inventory in that year. Means the company more selling than buying supplies. Then a decrease in the value of inventory is deducted from the price of the object of sale,  i.e. $80-$ 25 = $55.

The burden of salary and cash paid for salaries.

Starting balance salary debt, along with the burden of salary. That year is the total obligations to employees. The final balance of the salary debt indicates the number of unpaid obligations. Then the cash paid for salaries to employees can be calculate as follows:

The amount can also be calculate by subtracting the additional salary debts from $3 $25 the burden of salary. Reduce due to the increase of the salary unpaid debts with cash during the year.

The Burden of Shrinkage.

There is a trick question, "How does the cash paid for shrinkage?" The answer is no because the depreciation burden is non cash. The operating activities section of the Cross-Company cash flow statement using the direct method are.

Net cash flow operating activities can be ascertain either by using direct method or indirect method. Under direct method, cash from operating activities is determine by deducting all cash expenses from the revenue generate in cash. Under indirect method, cash from operating activities is calculate on the basis of net income. Even non-operating and non-cash items and changes in current assets and current liabilities. Both methods are equally applicable, however, Nepal accounting standard emphasis direct method. Accounting to be clause 03 and report cash flow from operating activities using the direct method.