A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. The direct method of preparing a cash flow statement shows the actual cash receipts and cash payments for a period, rather than relying on accrual accounting principles. This makes the direct method easier to prepare, but it can also be less informative than the indirect method.
There are many different templates available for creating a cash flow statement using the direct method. Some templates are designed to be used for specific purposes, such as tracking cash flow from operating activities. Others are more general-purpose and can be used for any type of cash flow statement.
Operating Activities
The operating activities section of a cash flow statement shows the cash flow from the company’s core business activities. This includes cash from sales, cash used to purchase inventory, and cash used to pay expenses.
To prepare the operating activities section using the direct method, simply list the major sources and uses of cash. For example, you would list sales as a source of cash and inventory purchases as a use of cash.
The net cash flow from operating activities is the total amount of cash generated from the company’s core business activities.
The operating activities section is the most important section of the cash flow statement. It shows how much cash the company is generating from its core business activities. A positive net cash flow from operating activities is a sign that the company is financially healthy.
Investing Activities
The investing activities section of a cash flow statement shows the cash flow from the company’s investing activities. This includes cash used to purchase property, plant, and equipment, and cash used to invest in other companies.
To prepare the investing activities section using the direct method, simply list the major sources and uses of cash. For example, you would list the purchase of property, plant, and equipment as a use of cash.
The net cash flow from investing activities is the total amount of cash used for investing activities.
The investing activities section shows how the company is using its cash to grow its business. A positive net cash flow from investing activities is a sign that the company is investing in its future.
Financing Activities
The financing activities section of a cash flow statement shows the cash flow from the company’s financing activities. This includes cash from issuing debt and equity, and cash used to repay debt.
To prepare the financing activities section using the direct method, simply list the major sources and uses of cash. For example, you would list the issuance of debt as a source of cash and the repayment of debt as a use of cash.
The net cash flow from financing activities is the total amount of cash used for financing activities.
The financing activities section shows how the company is financing its operations. A positive net cash flow from financing activities is a sign that the company is able to raise capital to fund its growth.
Conclusion
The cash flow statement is an important financial statement that provides information about the company’s cash flow. The direct method of preparing a cash flow statement is easier to prepare than the indirect method, but it can also be less informative.
When preparing a cash flow statement using the direct method, it is important to list the major sources and uses of cash for each section of the statement. The net cash flow from each section is then used to calculate the net cash flow for the period.
