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    Cash Flow Statement Direct Method

    The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. Items that typically do so include:

    • Cash collected from customers
    • Interest and dividends received
    • Cash paid to employees
    • Cash paid to suppliers
    • Interest paid
    • Income taxes paid

    The advantage of the direct method over the indirect method is that it reveals operating cash receipts and payments.

    The standard-setting bodies encourage the use of the direct method, but it is rarely used, for the excellent reason that the information in it is difficult to assemble; companies simply do not collect and store information in the manner required for this format. Using the direct method may require that the chart of accounts be restructured in order to collect different types of information. Instead, they use the indirect method, which can be more easily derived from existing accounting reports.

    Statement of Cash Flows Direct Method Example

    Lowry Locomotion constructs the following statement of cash flows using the direct method:

    Lowry Locomotion
    Statement of Cash Flows
    for the year ended 12/31/x1

    Cash flows from operating activities    
    Cash receipts from customers $45,800,000  
    Cash paid to suppliers (29,800,000)  
    Cash paid to employees (11,200,000)  
    Cash generated from operations 4,800,000  
    Interest paid (310,000)  
    Income taxes paid (1,700,000)  
    Net cash from operating activities   $2,790,000
    Cash flows from investing activities    
    Purchase of property, plant, and equipment (580,000)  
    Proceeds from sale of equipment 110,000  
    Net cash used in investing activities   (470,000)
    Cash flows from financing activities    
    Proceeds from issuance of common stock 1,000,000  
    Proceeds from issuance of long-term debt 500,000  
    Principal payments under capital lease obligation (10,000)  
    Dividends paid (450,000)  
    Net cash used in financing activities   1,040,000
    Net increase in cash and cash equivalents   3,360,000
    Cash and cash equivalents at beginning of period   1,640,000
    Cash and cash equivalents at end of period   $5,000,000


    Reconciliation of net income to net cash provided by operating activities:

    Net income   $2,665,000
    Adjustments to reconcile net income to net cash provided by operating activities:  
    Depreciation and amortization $125,000  
    Provision for losses on accounts receivable 15,000  
    Gain on sale of equipment (155,000)  
    Increase in interest and income taxes payable 32,000  
    Increase in deferred taxes 90,000  
    Increase in other liabilities 18,000  
    Total adjustments   125,000
    Net cash provided by operating activities   $2,790,000

    Related Topics

    Statement of cash flows overview
    Direct method
    How to prepare a cash flow statement
    What is a funds flow statement?