The first step in preparing the cash flow statement is to determine cash flows from operating activities, which can be presented using the direct or indirect method.
- Direct method uses the major categories of gross cash receipts and payments
- Indirect method reconciles net income to net cash flow.
Cash flows from investing activities and from financing activities are identical regardless of whether the direct or indirect method is used to present operating cash flows.
Companies often disclose only indirect operating cash flow information but understanding how cash flow information is put together will enable you to take an indirect statement apart and reconfigure it to approximate a direct cash flow statement, which—while not perfectly accurate—can be useful.
Operating Activities: Direct Method
- Cash received from customers
- Cash paid to suppliers
- Cash paid to employees
- Cash paid for other operating expenses
- Cash paid for interest
- Cash paid for income taxes
