Cash Flow from Operating Activities

Direct Method

In the direct method, the cash flow from operating activities is computed directly as the net sum of all operating cash flows. The following table shows examples of calculating cash flow from operating activities.

Cash Flows from Operating Activities Using the Direct Method
Cash Collections from SalesSales - increase (+ decrease) in Accounts Receivable - Bad Debt Expense
Cash Payments to SuppliersCost of Goods Sold + increase (- decrease) in Inventory - increase (+ decrease) in Accounts Payable
Cash Payments for Operating ExpensesTotal Operating Expense (excluding Bad Debt Exp) - other noncash expenses (depreciation/amortization) + increase (-decrease) in Other Accrued Liabilities
Other Income/Expense+/- Other Income/Expense
Cash paid for InterestInterest Expense
Dividends WithdrawalsDividends/Withdrawals Paid + increase (-decrease) in Dividends Payable
Cash paid for TaxesTax Expense — increase (+ decrease) in Accrued Taxes Payable — decrease (+ increase) in Prepaid Tax

The cash from operations using the direct method are presented below:

Cash Flow from Operations – Indirect Method

To calculate cash flow from operating activities using indirect method, we will start with the net income and reconcile it to net cash provided by operating activities as follows:

Net Income

(+) Depreciation

(-) Amortization of Bond Premium

(+) Amortization of Bond Discount

(-) Gain on Sale of Equipment

(+) Loss on Sale of Equipment

(+) Decrease in Accounts Receivable

(-) Increase in Accounts Receivable

(+) Decrease in Inventory

(-) Increase in Inventory

(-) Decrease in Accounts Payable

(+) Increase in Accounts Payable

(-) Decrease in Accrued Expenses

(+) Increase in Accrued Expenses

(+) Decrease in Prepaid Expenses

(-) Increase in Prepaid Expenses

(-) Decrease in Taxes Payable

(+) Increase in Taxes Payable

The cash from operations using the indirect method are presented below:

As you can see, both direct and indirect methods produce the same results.

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