Direct Method Cash Flow

What direct method cash flow covers

The direct method presents operating cash flows as the actual gross receipts and payments — cash collected from customers, cash paid to suppliers and employees, interest and tax paid. It is more informative to a reader than the indirect method because it shows where operating cash actually came from and went, though it requires converting each accrual-based figure back to cash.

These challenges give you the income statement and the movements in working capital, and ask for the operating section together with the supporting workings for each line.

Where marks are usually lost

• Adjusting a receipt line for the wrong direction of the receivables movement — a rise in receivables means less cash collected than revenue earned.
• Including non-cash expenses such as depreciation as a payment.
• Omitting the supporting schedules when the question asks for full workings.