What Is the Direct Cash Flow Method?

Direct method: direct listing of cash inflows and outflows in operating activities, similar to the cash-based listing of the company's operating activities' income and expenses; the indirect method (indirect method) Net profit in the table is adjusted to cash inflows and outflows from operating activities. The investment methods of both methods are the same as those of the financing activities. ^[1]

Direct method

Aiming at the shortcomings that translation method cannot cultivate students' listening and speaking ability, direct method came into being in Europe at the end of the 19th century. It contains three meanings: direct learning, direct understanding, and direct application. Its main features are: not allowed

The direct method is mainly used in the preparation of cash flow statements. It refers to the display of various types of cash flows through the main categories of cash income and cash expenditures. Generally, the operating income in the income statement is used as a starting point to adjust the changes in the related items to calculate cash flows .

The Accounting Standards for Business Enterprises (2006) stipulates that companies should use the direct method to report cash flows from operating activities, that is, to reflect cash flows from operating activities of the company through the main categories of cash income and cash expenditure.

When the direct method is used, information about cash flows from operating activities can be obtained through one of the following channels:

(1) Accounting records of the enterprise;

(2) Adjust operating income, operating costs and other items in the income statement based on the following items:

Changes in current inventory and operating receivables and payable items;

Other non-cash items such as depreciation of fixed assets and amortization of intangible assets;

The cash impact of other items belongs to the cash flow of investment or financing activities.

Corresponding to the direct method in accounting is the indirect method:

The indirect method refers to adjusting the increase and decrease of income, expenses, non-operating income and expenditure, and receivables and payable items, which are based on the current period's net profit, and calculate and display the cash flow of operating activities. The Accounting Standards for Business Enterprises (2006) stipulates that enterprises should adopt the indirect method to compile the attached cash flow statement.