Lesson 2 of 6 · 14 min
Operating cash flow: the direct method
The direct method lists operating cash by source and use, and each line is found by taking an income statement amount and adjusting it for the change in the related working capital account.
In short
- The direct method shows gross operating receipts (cash from customers) and payments (to suppliers, employees, for other expenses, interest and taxes).
- Each line = income statement amount ± change in the linked current asset or liability.
- Cash from customers = revenue − increase in receivables (+ increase in deferred revenue).
- Cash paid to suppliers takes two steps: COGS + increase in inventory = purchases; purchases − increase in payables = cash paid.
- Other lines: salaries ± salaries payable; other expenses ± prepaids and accrued liabilities; interest ± interest payable; taxes ± taxes payable, taxes receivable and deferred taxes.
- Depreciation and gains or losses on asset sales never appear: they are not operating cash.
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