Principles of Financial Accounting · free preview
The Direct Method for Operating Cash Flows
The direct method lists gross operating cash flows, cash collected from customers minus cash paid to suppliers, employees, and for interest and taxes, requiring conversion of accrual account balances into cash figures.
1. Gross flows instead of reconciliation
Gross flows instead of reconciliation
2. Converting revenue to cash collected
Converting revenue to cash collected
3. Converting expenses to cash paid
Converting expenses to cash paid
4. Reconciliation schedule requirement
Reconciliation schedule requirement
5. Direct versus indirect presentation
How does the direct method differ from the indirect method in presenting operating cash flow?
6. Collections conversion
Sales are 900,000 dollars and accounts receivable rose 15,000 dollars. Compute cash collected from customers in dollars, ignoring unearned revenue.
7. Supplier payments conversion
Cost of goods sold is 540,000 dollars, inventory fell 6,000 dollars, and accounts payable rose 9,000 dollars. Compute cash paid to suppliers.
8. Reconciliation schedule requirement
Why must a direct-method statement include an indirect-method reconciliation?
9. Conversion formula direction
Cash collected from customers equals sales revenue minus the increase in accounts ____ . One word.
10. Direct method readability advantage
The direct method's chief advantage is ____, showing the actual cash lines of the business. One word.
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