Operating Activities — Direct Method

Concept

Actual Cash Receipts and Payments

The direct method lists actual cash inflows and outflows from operations: cash collected from customers, cash paid to suppliers, cash paid for operating expenses, cash paid for interest and taxes. While the FASB encourages this method, most companies use indirect because it is simpler.

Example

Direct Method Format

Cash collected from customers: $195,000 Cash paid to suppliers: ($120,000) Cash paid for operating expenses: ($30,000) Cash paid for interest: ($5,000) Cash paid for income taxes: ($12,000) = Net cash from operating activities: $28,000

Key Point

Converting Sales to Cash

Cash collected = Sales Revenue + Decrease in A/R (or – Increase in A/R). If sales were $200,000 and A/R increased by $5,000, then cash collected = $195,000.

Operating Activities — Indirect Method

Investing & Financing Activities

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Practice Questions