A cash flow direct method formula is used to calculate cash inflows and cash outflows when preparing a cash flow statement using the direct method.
Using the direct method the cash flow from operating activities is calculated using cash receipts from sales, interest and dividends, and cash payments for expenses, interest and income tax. The listing shown below acts as a quick reference to each cash flow direct method formula used to calculate these cash receipts and payments.
Direct Method Cash Flow Formula
Cash Receipts from Customers Formula
The amount of cash received from customers is calculated by adjusting total sales shown in the income statement for the movement in the customer accounts receivable balances (AR) shown in the balance sheet. The cash flow direct method formula is as follows.
Receipts = Sales + Beginning AR - Ending AR
AR = Accounts receivable
Cash Paid to Suppliers Formula
The cash paid to suppliers for purchases relating to inventory is calculated by adjusting cost of goods sold (COGS) from the income statement for movements in inventory and accounts payable (AP) from the balance sheet. The cashflow direct method formula is as follows.
Payments = COGS + Ending inventory - Beginning Inventory + Beginning AP - Ending AP
COGS = Cost of goods sold , AP = Accounts payable
Cash Paid to Employees Formula
Wages paid is calculated by adjusting total wages from the income statement for movements in wages payable (WP) from the balance sheet. The cashflow direct method formula is as follows.
Payments = Wages expense + Beginning WP - Ending WP
WP = Wages payable
Cash Paid for Operating Expenses
The cash paid in respect of expenses is calculated by adjusting total expenses from the income statement for movements in prepaid expenses and accrued expenses from the balance sheet. The cashflow direct method formula is as follows.
Payments = Expenses + Ending prepaid expenses - Beginning prepaid expenses + Beginning accrued expenses - Ending accrued expenses
Interest Receipts
The amount of interest receipts is calculated by adjusting the interest income shown in the income statement for the movement in the interest receivable balances (IR) shown in the balance sheet. The cashflow direct method formula is as follows.
Receipts = Interest income + Beginning IR - Ending IR
IR = Interest receivable
Dividend Received
Calculate the amount of dividends received by adjusting the dividend income shown in the income statement for the movement in the dividends receivable balances (DR) shown in the balance sheet. The cashflow direct method formula is as follows.
Receipts = Dividends income + Beginning DR - Ending DR
DR = Dividends receivable
Cash Paid for Interest Formula
Calculate the Interest paid by adjusting the total interest expense from the income statement for movements in interest payable (IP) from the balance sheet. The cash flow direct method formula is as follows.
Payments = Interest expense + Beginning IP - Ending IP
IP = Interest payable
Cash Paid for Income Taxes Formula
Calculate the income taxes paid by adjusting the total income tax expense from the income statement for movements in income tax payable (TP) from the balance sheet. The cash flow direct method formula is as follows.
Payments = Income tax expense + Beginning TP - Ending TP
TP = Income tax payable
Statement of Cash Flows Direct Method Layout
The receipts and payments information calculated using the cash flow direct method formulas shown above are used to construct the direct method cash flow statement in a format similar to that shown below.
| Cash receipts from customers | 30,000 |
| Cash paid to suppliers | -10,000 |
| Cash paid to employees | -7,000 |
| Cash paid for expenses | -5,000 |
| Interest received | 500 |
| Dividend received | 400 |
| Interest paid | -2,000 |
| Income tax paid | -3,000 |
| Cash flow from operating activities | 3,900 |
Popular Double Entry Bookkeeping References
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.