What is the direct cash flow method?

The direct cash flow method is the style of preparation for cash flows. This statement is one of three important financial statements prepared and published companies. According to the company's direct cash flow method, the company uses actual income and other paperwork to display all cash movements within the company. The direct method is usually a preferred method for preparing the cash flow statement in accordance with accounting and government agencies. Each section has specific information taken from other financial statements of the company. Operating activities include cash income from income and cash outflows concerning expenditure in a specific accounting period. Investment activities include income and payments from the sale and purchase of long -term assets. Financial activities relate to revenues from loans or issuing ordinary shares and drains from repayment of borrowed funds and payouts to investors.

According to the direct cash flow method, each section - operating, investment and financing - first states all the inflow of cash and follows cash drains. A brief description provides information about the nature of the cash movement. At the bottom of the statement, the total number of each section provides a total increase or decrease in cash per month. This sum is then added to the initial balance of the cash flow statements; This balance represents the end balance of the previous statement of cash flows. The resulting total amount indicates the total cash generated for the entire accounting period, usually the current calendar year.

Some cashless transactions can also continue to state the cash flows. The purpose of these items is to inform the financial statements users of other transacts that may include cash in the future. The direct cash flow method allows this information at the bottom of the command. These transactions are usually called investment and financial activitieswithout an indicator. Examples of these transactions include the issue of a bond for a long -term asset, obtaining a mortgage for a building or similar transactions.

Making cash flows to a separate statement is essential when companies use the accounting method based on an accrual basis. The acrual accounting records of transactions that occur, which does not take into account the movement of cash in business. Because most companies use the accrual accounting method, the direct cash flow method helps companies to manage cash. Another reason for the statement of cash flows is that companies can report a net loss per year, but still have a positive cash flow. This occurs because some transactions without re-evaluating the depreciation or amortization expenditure-do not affect cash but negatively affect the inome statements.