Cash Flows Direct Method - AccountingTools

Top

Newsletter Sign Up

Home >> Financial Statements Topics

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 typically affecting cash flow 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. However, the method is rarely used because few organizations aggregate cash flow information in the manner required to report under the direct method. The indirect method is much more frequently used, because it can be derived directly from typical accounting reports.

Statement of Cash Flows Direct Method Example

Ajax Machining Company constructs the following statement of cash flows using the direct method:

Ajax Machining Company
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