How to Prepare a Cash Flow Statement Direct Method?

The direct method of preparing a cash flow statement focuses on the actual cash inflows and outflows related to a company's operating, investing, and financing activities. Here's a step-by-step guide:

Step 1: Identify Cash Inflows and Outflows

• Operating Activities:
  • Cash received from customers: Add up all cash collected from sales of goods or services during the period.
  • Cash paid to suppliers: Include all cash payments made for inventory, raw materials, and other operating expenses.
  • Cash paid to employees: Add up all salaries, wages, and benefits paid to employees.
  • Cash paid for other operating expenses: Include all cash payments for rent, utilities, insurance, and other operating costs.
• Investing Activities:
  • Cash received from the sale of long-term assets: Include cash received from selling property, plant, equipment, or investments.
  • Cash paid for the purchase of long-term assets: Include cash spent on buying new property, plant, equipment, or investments.
• Financing Activities:
  • Cash received from issuing debt or equity: Add up all cash received from issuing bonds, notes, or stock.
  • Cash paid for debt repayment: Include all cash paid to repay debt obligations.
  • Cash paid for dividends: Add up all cash paid to shareholders as dividends.

Step 2: Organize by Activity

• Create a table with three columns:
  • Operating Activities
  • Investing Activities
  • Financing Activities
• List the cash inflows under the appropriate column.
• List the cash outflows (with a negative sign) under the appropriate column.

Step 3: Calculate Net Cash Flow

• Operating Activities: Subtract total cash outflows from total cash inflows to calculate net cash flow from operating activities.
• Investing Activities: Subtract total cash outflows from total cash inflows to calculate net cash flow from investing activities.
• Financing Activities: Subtract total cash outflows from total cash inflows to calculate net cash flow from financing activities.

Step 4: Calculate Total Net Cash Flow

• Add the net cash flows from operating, investing, and financing activities to determine the total net cash flow for the period.

Example:

Let's say a company has the following cash flows for the year:

• Cash received from customers: $500,000
• Cash paid to suppliers: $250,000
• Cash paid to employees: $100,000
• Cash paid for other operating expenses: $50,000
• Cash received from selling equipment: $20,000
• Cash paid for buying new equipment: $40,000
• Cash received from issuing bonds: $100,000
• Cash paid for debt repayment: $30,000

The cash flow statement direct method would look like this:

Important Note:

• The direct method provides a more transparent view of actual cash flows compared to the indirect method.
• It is generally preferred by investors and creditors who are looking for detailed information about a company's cash flow.