Cash Flow Statement Direct and Indirect Method
Indirect Method Cash Flow Statement
In indirect method of cash flow statement, the statement is begin by recording the net income from income statement and makes adjustments to it for non-cash transactions and non operating items to arrive at the net operating cash flow.
The reporting of cash flows in indirect method is representing under this table:
| Net income | |
| + | Non-cash expenses |
| + | Increase in current liabilities |
| + | Decrease in current assets |
| – | Increase in current assets |
| – | Decrease in current liabilities |
| – | Gain from investing & financing activities |
| + | Loss from investing & financing activities |
| = | Cash flow from operating activities |
Direct Method Cash Flow Statement
The cash flow statement direct method records the cash receipts and payment during an accounting period under cash system of accounting and also excludes the accrual system of accounting. Indirect method cash flow statement is started by deducting the cash inflow from cash outflow to work downward toward the net operating cash flow.
Reporting cash flows from operating activities under the Direct Method
Operating activities of the firms typically result in increase and decrease of current assets and liabilities of the firm. Operating activities include acquiring and selling products in the normal course of business. Different types of business will have a different type of transactions that are included in cash flow from operating activities.
Operating activities – Direct method
Calculating cash received from customers
Balances from income statement Adjustments balances from statement of cash flows
– Increase in account receivable
Or
= cash collected from sales
+ Decrease in account receivable
Cash paid for operating expenses
Operating expenses = increase in payable – decrease in payable
Calculating cash paid for inventory
Inventory sold during the period XX
+ Increase in inventory X
Inventory purchased during period XX
-Increase in account payable ( X)
Cash paid to suppliers for the period XX
There are two items ignored in the operating activities section under the direct method that are depreciation and gain / loss on sale of equipment.
Types of investing inflow and out the flow of cash – Direct method
| Operating cash inflows in to firm | Operating cash out flow in firm |
| ● Sale of fixed assets
● Sales of investment ● Dividend received |
● Purchase fixed assets
● Purchase of investment |
Types of financing inflows and outflow of cash – Direct method
| Operating cash inflows in to firm | Operating cash out flow in firm |
| ● Issue of shares in cash
● Issue of debentures in cash ● selling stock ● contribution from owners |
● payment of loan
● redemption of preference share ● Payment of dividend |