Direct Method Cash Flow – How To Write The Statement

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 the 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 inflow is basically a combination of income from interests, direct cash received from the customers, additional dividents and the rest of the cash operating receipts.
Gross cash outflows mean all types of taxes and interest payments, money paid to employees and suppliers and operating payments in cash.

Investments

Cash inflow consists of loan collections, equity sales and assets sales (ex: technical devices).
Cash outflow consists of payments in order to acquire debt, receive equity instruments and to buy assets (ex: technical devices).

Finances

Cash inflow is made up of contributions, money borrowing, income from investments and stock sales.
Cash outflow comprises money from reacquiring the company equity, purchasing stock shares back, shareholders’ dividends and payments towards principal on debt.

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

and then

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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