Direct method cash flow statement
A cash flow statement traces the flow of funds into and out of a business during an accounting period. The cash flow statement’s main purpose is to provide information regarding a company’s cash receipts and cash payments. The cash flow statement complements the income statement and balance sheet. There are two types of statement of cash flows, the direct method and the indirect method cash flow statement. The direct method cash flow statement is divided into three sections:
- Operations-Reports gross cash inflows and gross outflows
- Gross cash inflows include cash collections from customers, interest income, dividends and any other operating cash receipts.
- Gross cash outflows include payments to suppliers, salaries, interest payments, taxes and any other operating cash payments.
- Investing activities
- Cash inflow includes loan collections, cash from sale of equity such as stocks, and cash from sale of assets such as plants and equipment
- Cash outflow includes cash paid to acquire debt, purchase equity instruments, and to purchase assets such as plants and equipment
- Financing activities
- Cash inflow includes cash from sale of stock, cash from borrowing, cash from contributions and investment income.
- Cash outflow includes cash paid towards principal on debt, to reacquire equity or buying back shares of stock, and dividend payments to shareholders.
The direct method differs from the indirect method in the operations section. Things like depreciation, amortization of intangible assets, and preliminary expenses are ignored as the direct method includes only cash transactions and non-cash transactions are left out. The investing and financing sections are the same on both direct and indirect cash flow statements
Formulas for direct method cash flow statements
The following are a few of the formulas used when preparing direct method cash flow statements:
- Cash received from customers = Sales + decrease in accounts receivable
Sales – increase in accounts receivable
- Cash payments to suppliers =
1)Cost of purchases = Cost of goods sold + increase in inventory
Cost of goods sold – decrease in inventory
2)Cash Payments to Suppliers = Cost of purchases + decrease in accounts payable
Cost of purchases – increase in accounts payable
- Cash paid for interest = Interest + decrease in interest payable
Interest – increase in interest payable
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