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Direct Method (GAAP)
In November 1987, Financial Statement Accounting Board (FASB) issues SFAS 95, Statement of Cash Flows. Under SFAS 95, the Statement of Cash Flows may be presented using either the Direct Method (Income Statement Method) or the Indirect Method (Reconciliation Method). Both the Direct and Indirect methods require that cash flows be classified into three categories: operating, investing (a/k/a discretionary), and financing. The investing and financing categories are treated the same under both methods. Operating activities, however, are treated very differently.
The direct method takes various cash activities, receipts from customers, payments to suppliers, cash paid to workers and combines them to determine cash flow from operations
Important Calculations
Cash Receipts from Customers
Sales
- Sales Returns & Allowances
Net Sales
+ Beginning Accounts Receivable
- Ending Accounts Receivable
Cash Receipts from Customers
Cash Payments to Suppliers
Purchases
+ Ending Inventory
- Beginning Inventory
+ Beginning Accounts Payable
- Ending Accounts Payable
Cash Payments to Suppliers
Cash Payments to Employees
Salary Expense
+ Beginning Salaries Payable
- Ending Salaries Payable
Cash Payments to Employees
Cash Payments on Prepaid Assets
Ending Prepaids (insurance, rent, etc)
+ Expired Rent, Expired Insurance
- Beginning Prepaid Assets
Cash Payments on Prepaid Assets
Income Tax Payments
Beginning Income Tax Payable
- Ending Income Tax Payable
+ Income Tax Expense
Income Tax Payments
Interest Payments
Interest Expense
+ Beginning Interest Payable
- Ending Interest Payable
Interest Payments
Statement of Cash Flows
(Direct Method) FAS 95
CASH FLOW FROM OPERATING ACTIVITIES
Cash Received from Customers (+)
Cash Paid to Suppliers (-)
Cash Paid to Employees (-)
Cash Payments on Prepaid Assets (-)
Interest Paid (-)
Income Taxes Paid (-)
Interest & Dividends Received (+)
Misc Cash Received (Paid) (+/-)
NET CASH PROVIDED BY OPERATIONS
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of PP&E (-)
Proceeds from Sale of Equipment (+)
Change in Investments
Change in Intangibles - Net
NET CASH USED IN INVESTING
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Liabilities
Change in Long-Term Debt
Proceeds from Issuance of Common Stock (+)
Change in Capital Lease Obligations
Dividends Paid (-)
NET CASH USED IN FINANCING ACTIVITIES
Net Increase in Cash and Cash Equivalents
Cash at beginning of period
Cash at end of period