- Cash Flow Statement
- Noncash Investing and Financing Activities
- Cash Flow Statements: US GAAP Vs. IFRS
- Cash Flow Statements - Direct and Indirect Method
- Significance of Cash Flows
- Steps to Prepare Statement of Cash Flows
- Cash Flow from Operating Activities
- Cash Flow from Investing and Financing Activities
- Free Cash Flow to the Firm and Equity
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 Sales | Sales - increase (+ decrease) in Accounts Receivable - Bad Debt Expense |
| Cash Payments to Suppliers | Cost of Goods Sold + increase (- decrease) in Inventory - increase (+ decrease) in Accounts Payable |
| Cash Payments for Operating Expenses | Total 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 Interest | Interest Expense |
| Dividends Withdrawals | Dividends/Withdrawals Paid + increase (-decrease) in Dividends Payable |
| Cash paid for Taxes | Tax 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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