![]() These expenses do not directly affect the cash flow but must be included in the cash flow statement. Also, adjustments for non-operating expenses like accounts payable, accounts receivable, inventory, depreciation, etc., are made to determine the cash for the company’s operating expenses. Afterwards, the net income is adjusted for any changes in assets or liabilities account on the balance sheet. Therefore, this method always starts with net income taken from the income statement. The indirect method uses the accrual accounting information where the revenue and expenses are included when the transaction is made rather than when money is received. ![]() Net cash provided (used) in financing activities Net cash provided by operating activities ![]() The following is an example for a cash flow statement under direct method for XYZ company for the financial year 2020-2021 Particulars However, it may be time-consuming as it must be reconciled with the income statement. Moreover, this method is easier for small businesses as they use a cash basis accounting method. The direct method is also known as the income statement method. In simple words, this method only measures the cash received and paid out due to the company’s operating activities. The direct method uses the gross cash payments and receipts, including the cash paid to suppliers, cash receipts from customers and also cash paid out as salaries. There are two methods to prepare a cash flow statement, namely the direct method and also indirect method – Direct method For instance, the previous cash flow statements help to make decisions in forecasting the cash deficit the company will face after paying off the debt obligations or establishing a cash surplus to request credit from banks. Also, the CFS helps the financial manager analyse the past transactions data to make a cash flow projection for immediate future planning. Hence, businesses must always have a sufficient amount of cash to fulfil their upcoming payments.
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