Accounting

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 firmOperating cash out flow in firm
●     Sale of fixed assets

●     Sales of investment

●     Dividend received

●     Purchase fixed assets

●     Purchase of investment

●     Working capital

Types of financing inflows and outflow of cash – Direct method

 

Operating cash inflows in to firmOperating 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

 

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