Cash Flow Direct Method Formula

A cash flow direct method formula is used to calculate cash inflows and cash outflows when preparing a cash flow statement using the direct method.

Using the direct method the cash flow from operating activities is calculated using cash receipts from sales, interest and dividends, and cash payments for expenses, interest and income tax. The listing shown below acts as a quick reference to each cash flow direct method formula used to calculate these cash receipts and payments.

Cash Flow Direct Method Formula

Cash Received from Customers

The amount of cash received from customers is calculated by adjusting total sales shown in the income statement for the movement in the customer accounts receivable balances (AR) shown in the balance sheet. The cash flow direct method formula is as follows.

Receipts = Sales + Beginning AR - Ending AR

AR = Accounts receivable

Cash Paid to Suppliers

The cash paid to suppliers for purchases relating to inventory is calculated by adjusting cost of goods sold (COGS) from the income statement for movements in inventory and accounts payable (AP) from the balance sheet. The cash flow direct method formula is as follows.

Payments = COGS + Ending inventory - Beginning Inventory + Beginning AP - Ending AP

COGS = Cost of goods sold, AP = Accounts payable

Cash Paid to Employees

Wages paid is calculated by adjusting total wages from the income statement for movements in wages payable (WP) from the balance sheet. The cash flow direct method formula is as follows.

Payments = Wages expense + Beginning WP - Ending WP

WP = Wages payable

Cash Paid for Expenses

The cash paid in respect of expenses is calculated by adjusting total expenses from the income statement for movements in prepaid expenses and accrued expenses from the balance sheet. The cash flow direct method formula is as follows.

Payments = Expenses + Ending prepaid expenses - Beginning prepaid expenses + Beginning accrued expenses - Ending accrued expenses

Interest Received

The amount of interest received is calculated by adjusting the interest income shown in the income statement for the movement in the interest receivable balances (IR) shown in the balance sheet. The cash flow direct method formula is as follows.

Receipts = Interest income + Beginning IR - Ending IR

IR = Interest receivable

Dividend Received

The amount of dividends received is calculated by adjusting the dividend income shown in the income statement for the movement in the dividends receivable balances (DR) shown in the balance sheet. The cash flow direct method formula is as follows.

Receipts = Dividends income + Beginning DR - Ending DR

DR = Dividends receivable

Interest Paid

Interest paid is calculated by adjusting the total interest expense from the income statement for movements in interest payable (IP) from the balance sheet. The cash flow direct method formula is as follows.

Payments = Interest expense + Beginning IP - Ending IP

IP = Interest payable

Income Tax Paid

Income tax paid is calculated by adjusting the total income tax expense from the income statement for movements in income tax payable (TP) from the balance sheet. The cash flow direct method formula is as follows.

Payments = Income tax expense + Beginning TP - Ending TP

TP = Income tax payable

Statement of Cash Flows Direct Method Layout

The receipts and payments information calculated using the cash flow direct method formulas shown above are used to construct the direct method cash flow statement in a format similar to that shown below.

Cash Flow Statement Direct Method
Cash receipts from customers 30,000
Cash paid to suppliers -10,000
Cash paid to employees -7,000
Cash paid for expenses -5,000
Interest received 500
Dividend received 400
Interest paid -2,000
Income tax paid -3,000
Cash flow from operating activities 3,900

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Cash Flow Direct Method Formula January 11th, 2018Team

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