The direct method cash flow statement is informal that it shows all of the main operating cash receipts and payments during the accounting period by the experts. It lists the cash inflows which usually came from customers and cash outflows which went, typically employees, retailers, etc.

Direct Method Cash Flow Statement

The direct method used to determine cash flow (inflows and outflows) from operating activities related to the things that may disturb cash flow, which may include various types of cash receipts and payments such as;

  • Cash collected from customers
  • Interest and shares received
  • Cash paid to staffs
  • Cash paid to providers or sealers
  • Interest paid
  • Income taxes paid

We put these elements together in the operating part of the cash flow statement. These things determine by the start and finish of balances of several company business accounts and also the clear increase or decrease in the account cash.

Direct Method Cash Flow Advantages

By mentioning all these payments provide the financial statement to employers which a great transaction of information from where cash is coming from (inflows) and where payments are going to (outflows). This is one of the main advantages when we matched direct method with the indirect method. While on the other hand, indirect method doesn’t list these types of information.

Investing Cash Flow Template Excel

Direct Method Cash Flows Statements Formulas

Following are some important formulas to calculate cash inflow and outflows in the cash flow statement

Cash Receipts from Customers =

+Net Sales

+Starting Accounts Rechargeable (Receivable)

– Finishing Accounts Rechargeable

Cash Payments to Suppliers =

+ Purchases (investment)

+ Finishing Account (inventory)

– Starting Inventory

+ Starting Accounts Payable

– Finishing Accounts Payable

Cash Payments to Employees=  

+ Starting Salaries Payable

– Finishing Salaries Payable

+ Salaries Expenditure

Cash Payments for Buying of Prepaid Resources (assets) =

+Ending Prepaid Rent, Prepaid Insurance etc.

+Finished Rent, Finished Insurance etc.

−starting Prepaid Rent, Prepaid Insurance etc.

Interest Payments =

+ starting Interest Payable

−Ending Interest Payable

+Interest Expense

Income Tax Payments =

+Beginning Income Tax Payable

−Ending Income Tax Payable

+Income Tax Expense

Example of Direct Method Cash Flow Statement

By using the Direct Method of Cash Flow Statement we try to solve the example by the given information given below;

December 31 2017 2016
Accounts Receivable $34,130 $28,410
Prepaid Rent 20,000 25,000
Prepaid Insurance 6,800 6,000
Inventory 23,030 15,450
Accounts Payable 14,590 31,300
Salaries Payable 8,310 5,120
Interest Payable 700 360
Income Tax Payable 2,340 0
Year Ended December 31 2017
Net Sales 64,970
Salaries Expense 8,610
Rent Expense 5,000
Insurance Expense 3,200
Interest Expense 1,650




Cash Flow from Operating Activities:
Cash Receipts
From Customers (1) $59,250
Cash Payments
To Suppliers (2) −24,290
To Employees (3) −5,420
For Purchase of Prepaid Assets (4) −4,000
Interest (5) −1,310
Income Tax (6) −0
Net Cash Flow from Operating Activities 24,230

Working Notes

1) 64,970 + 28,410 – 34,130
2) 23,030 – 15,450 + 31,300 – 14,590
3) 5,120 – 8,310 + 8,610
4) 20,000 + 6,800 + 5,000 + 3,200 – 25,000 – 6,000
5) 360 – 700 + 1,650
6) 0 – 2,340 + 2,340


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