Is Your Cash Flow Statement Direct or Indirect (by Oana Labes, MBA, CPA)? Cash flow statements have 3 main sections: ➡️ Operating cash flows / Cash flow from operations ➡️ Investing cash flows / Cash flows from investing ➡️ Financing cash flows / Cash flows from financing ⚫ The only difference between the direct and indirect cash flow statements is how you calculate 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬. 1️⃣ 𝐇𝐞𝐫𝐞'𝐬 𝐡𝐨𝐰 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐢𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐦𝐞𝐭𝐡𝐨𝐝: ✔️ start with net income from the Income Statement, which has been reported using accrual accounting ✔️ because your accrual income statement recognized revenues and expenses when they were incurred not when they were settled, it needs to be de-accrued to convert it into cash ✔️make adjustments for non-cash transactions such as depreciation and amortization, share based compensation, gains or losses from the sale of fixed assets or investments ✔️ make adjustments for non-operating items considered in the other two sections of the cash flow statement (e.g. dividend payments received potentially included in investing cash flows,) ✔️ make adjustments for changes in current assets and current liabilities (receivables, payables, inventories, prepaids, accruals) 2️⃣ 𝐇𝐞𝐫𝐞'𝐬 𝐡𝐨𝐰 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐜𝐚𝐬𝐡 𝐟𝐥𝐨𝐰𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐝𝐢𝐫𝐞𝐜𝐭 𝐦𝐞𝐭𝐡𝐨𝐝: ✔️ directly net the cash collections and disbursements during the period ✔️ instead of reconciling the accrual income statement, directly consider cash based inflows and outflows from operations ✔️ add: ▪️net cash from customers ▪️cash paid to employees ▪️cash paid to suppliers ▪️cash paid for interest ▪️cash paid for taxes 🎯 Remember: ⚫ Accounting frameworks offer you a choice between the indirect and the direct method. ⚫ Investors and analysts frequently prefer the direct method because it provides more transparency into your company's cash flows and shows the actual cash you received and paid out during the period. ⚫ Most companies however choose the indirect method, because it’s faster to get access to the required information, and thus easier to put together. 🎯 This is an excerpt from my 5⭐ rated Cash Flow Masterclass. Learn cash flow strategy and start compounding your impact and influence in less than 2 hours, bit-size lessons, and lifetime access. Or check out the Executive Edition for even more streamlined content. ➡️ What would you add? ---------- 📺 FinanceMaster on YouTube: https://bit.ly/4bSBut6 📢 Join our WhatsApp channel: https://bit.ly/3WWGOrc 👩🏫 Our LinkedIn Learning course: https://bit.ly/4a5fB9l 📻 FinanceMaster Podcast: https://bit.ly/3NLSt73 📄 FinanceMaster resources: https://lnkd.in/eC_zuCU4
Love this, very useful tips. Thanks.
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Useful tips
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1moMost struggle creating a cash flow statement. Often, it’s because the company uses the indirect method. This is a great comparison as it helps you understand the differences. Which one do you use in your company?