Net Cash Flow from Operating Activities:

Direct Method
Chapter 23, pt. 2
Learning Objective #3
 Direct Method

• Reports cash receipts and cash disbursements from operating activities

• Encouraged method of use by FASB
• Use of Indirect method permitted
• Company must provide separate schedule of indirect (reconciliation) method

Operating Cash Receipts

_____– Operating Cash Disbursements______
Net Cash Flow from Operating Activities
Classes of Receipts and Payments
Classes of Receipts and Payments
Direct Method Example
Direct Method Example
Direct Method Example
 Direct vs. Indirect

Direct Method Indirect Method

• More consistent with object of Statement of Cash • Focuses on differences between net income and
Flows net cash flow from operating activities
• Reveals company’s abilities to: • Link between statement of cash flows and income
• Generate sufficient cash from operating activities to pay statement & balance sheet
debts
• To reinvest in operations
• To make distributions to owners

• Financial statement users prefer it

 Special Reporting Rules

Receipts Payments
• Cash collected from customers (including • Cash paid to employees and suppliers of
lessees, licensees, etc.) goods or services (including suppliers of
• Interest and dividends received insurance, advertising, etc.)

• Other operating cash receipts, if any • Interest paid

• Income taxes paid
• Other operating cash payments, if any