How to use the direct method cash flow statement builder
- Enter revenue, cost of goods sold, operating expenses before depreciation, depreciation, interest expense and income tax expense.
- Enter the increase in accounts receivable, inventory, accounts payable and accrued expenses. Use a negative number for a decrease.
- Read the cash received from customers, the cash paid to suppliers and the cash paid for expenses.
- Check that the direct method agrees with the indirect method in the second part of the table.
Formula
Cash from customers = revenue - increase in receivables
Cash to suppliers = cost of goods + increase in inventory - increase in payables
Cash for expenses, interest and tax = operating expenses + interest + tax - increase in accrued expenses
Check: net income + depreciation - increases in receivables and inventory + increases in payables and accruals
Both methods give the same net cash from operations. They only show it in two different ways.
A business with $900,000 of revenue
With receivables up $35,000, the cash received from customers is $900,000 - $35,000 = $865,000. Cost of goods of $520,000 with inventory up $18,000 and payables up $14,000 means $524,000 was paid to suppliers. Expenses, interest and tax of $210,000 + $12,000 + $27,000 = $249,000, less a $6,000 increase in accruals, means $243,000 was paid.
The net cash from operations is $865,000 - $524,000 - $243,000 = $98,000. By the indirect method, net income of $101,000 plus depreciation of $30,000 less a net $33,000 of working capital build-up also gives $98,000.
Direct and indirect
The indirect method starts with net income and adjusts it for non-cash items and changes in working capital. The direct method lists the actual cash received and paid. The two always agree on the total, but the direct method shows where the cash came from and went, which many readers find easier to understand. Some reporting frameworks encourage it and many companies still use the indirect method because the data is easier to collect.
Seeing both on the same page also works as a check on the entries behind them. If the two totals differ, one of the working capital changes has the wrong sign or a line has been left out.
What this tool simplifies
It combines operating expenses, interest and tax into one line because the change in accrued liabilities cannot be split among them without more detail. Real statements break out interest and tax paid, and they have investing and financing sections. For the indirect version of the statement, see the Indirect Cash Flow Statement Builder. The Cash Flow Forecast Calculator looks ahead, the Cash Conversion Cycle Calculator measures how long cash is tied up, and the Accounts Payable Turnover Calculator shows how fast you pay suppliers.
Assumptions and limits
- Operating expenses are entered before depreciation, which is a non-cash charge.
- Interest and tax are paid in the period except for the change in accrued expenses.
- There are no other non-cash items, gains or losses.
- The figures shown are examples. Amounts in parentheses are negative.
Frequently asked questions
Why do the two methods always agree?
Both start from the same revenue and costs and adjust for the same changes in working capital. They are two ways of adding up the same cash.
What if a balance went down?
Enter the decrease as a negative number. A fall in receivables, for example, means you collected more cash than the revenue you recorded.
Where do purchases of equipment go?
They are investing cash flows and are not part of this operating section.
Can I use it for a month instead of a year?
Yes. Enter the month's income statement lines and the changes in working capital over the same month.