direct method cash flow statement

Popular Terms
Begins with cash provided by the sales from which cash paid for operating expenses is deducted to arrive at the net cash flow from operating activities. To this amount cash inflows from investing activities and financing activities are added and related cash outflows are deducted. The resulting figure gives the cash balance at the end of the period for which the statement was prepared. Direct method is simpler than the indirect method (see indirect method cash flow statement) and shows the sources and uses of cash. But it requires a thorough familiarity with the manner in which the firm receives cash from sales, and incurs and pays expenses.
However, where a supplementary schedule to reconcile net income with cash flows from operating activities is required, a cash flow statement prepared with the indirect method becomes a necessity. It is called 'direct' because it proceeds from actual cash receipts and cash disbursements, instead of with the net income. See also cash receipts and disbursements approach.


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