While
preparing a cash flow statement with direct method a company uses gross cash
receipts and gross cash payments as parameters. In the direct method the
dividend received by the company can either be listed under the operating
activities or under the investment activities. In this method the taxes paid
are listed under operating activities if they are directly linked to the
operating activities. However, if taxes are directly related to the investing
or financing activities they are listed in the corresponding sections of the
cash flow statement. The direct method of preparing cash flow statement is also
called the income statement method of the cash flow statement preparation. In
the direct method the operating cash disbursements are deducted from the net
cash receipts of the operating activities.
To
understand the direct method of cash flow statement preparation let’s take an
example of a company. Suppose the company ABC Limited has revenues of $125,000
for a specific part of the fiscal year 2010. The accounts receivable of the
Company ABC Limited are $36,000 only. Now first we have to calculate the cash
collected from the revenue. This can be calculated as under:-
Cash Collected from Revenue= Total
Revenue – Account Receivable
Cash collected from revenues = $125,000 - $36,000
Cash Collected from revenues = $89,000
The operating expense of the company for that period of time
were $85,000 and the account payable for the company at that interval of time
increased at an amount of $5000. Now we have to calculate cash operating
expense of the company. The cash operating expense can be calculated as:-
Cash payment for expense = Operating
Expense – Accounts Payable
Cash payment for expense = $85,000 - $5000
Cash payment for expense = $80,000
Now the income tax expense of the ABC Limited for that year
was $6000. For the above mentioned data we can easily prepare the cash flow
statement with the help of direct method
|
Cash Collected from
Revenues
|
$89,000
|
|
Cash Payment for
Expense
|
$80,000
|
|
Income before paying
income taxes
|
$9000
|
|
Cash payment of
Income tax for the year
|
$6000
|
|
Net Cash provided by
Operating activities
|
$3000
|
