Cash Flows from Operations (Direct Method)

Learning Outcomes

  • Calculate cash flows from operating activities by the direct method

The direct method of presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. Items that typically do so include:

  • Cash collected from customers
  • Interest and dividends received
  • Cash paid to employees
  • Cash paid to suppliers
  • Interest paid
  • Income taxes paid

Looking at only the operating section of our Rumble Corp. statement of cash flows:

Rumble Corp.
Statement of Cash Flows
for the year ended 12/31/x1
Description Amount Total
In millions
Subcategory, Cash flows from operating activities
Cash receipts from customers $ 45,800
Cash paid to suppliers (29,800)
Cash paid to employees (11,200)
Cash generated from operations Single Line
Interest paid (310)
Income taxes paid (1,700)
Net cash from operating activities Single Line Single Line

Unlike the income statement, statement of owner’s equity, and balance sheet, these numbers are not readily available from the trial balance. However, most reputable accounting information systems do a credible job of tracking these transactions in order to automatically produce the statement of cash flows along with the other required financial statements. If your company’s computerized system does not have that capability, you’ll have to dig into the accounting records to find these numbers, or resort to the indirect method that we’ll study next.

Here is a summary of how the statement of cash flows would be prepared using the direct method:

You can view the transcript for “Intro to Cash Flow Statements | Direct Method” here (opens in new window).

practice question