Cash payments to suppliers would appear on a statement of cash flows using the direct method as a(n)

In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation.

The Cash Flow from Operations in the Cash Flow Statement represent Cash transactions that have to do with a company's core operations and is therefore an extremely important measure of the health of a Business.

There are two ways in which we calculate the Cash Flow From Operations.

They are - 

1. The Direct Method and 

2. The Indirect Method 

The Direct Method is the method preferred by the Financial Accounting Standards Board (FASB) because it gives deeper insights into the movement of Cash in a Business.

It does so by GROUPING Cash Transactions into major classes of cash receipts and cash payments.

These Grouped Transactions make the Cash Flow Statement much more detailed and user friendly.

The figure below illustrates the a Framework of the major groupings using the Direct Method.

CASH FLOW FROM OPERATING ACTIVITIES 

GROUP 1: 

Cash Received from Customers

Cash Paid to Suppliers

Cash Paid for Operating Expenses (Includes Research and Development)

GROUP 2: 

Interest Received

Interest Paid

GROUP 3: 

Income Tax Refund Received

Income Tax Refund Paid

GROUP 4: 

Other Cash received (paid)

The Total of these give the net cash provided (used) in operating activities.

Obviously, the words GROUPED written above are not mentioned in the Cash Flow Statement and are for your understanding only.

Each segment in the groups mentioned above can be derived using a Formula.

The Formulas are summarized below.

CASH FLOW FROM OPERATING ACTIVITIES 

GROUP 1: 

Cash Received from Customers = Sales + Decrease (or - Increase) in Accounts Receivable.

Cash Paid to Suppliers = Cost of Goods Sold + Increase (or - Decrease) in Inventory + Decrease (or - Increase) in Accounts Payable 

Cash Paid for Operating Expenses (Includes Research and Development) = Operating Expenses + Increase (or - decrease) in prepaid expenses + decrease (or - increase) in accrued liabilities. 

GROUP 2: 

Cash Interest = Interest Expense - increase (or + decrease) in interest payable + amortization of bond premium (or - discount). 

GROUP 3: 

Cash Payments for Income Taxes = Income Taxes + Decrease (or - increase) in Income Taxes Payable. 

Income Tax Refund Paid

GROUP 4: 

Other Cash received (paid)

The Total of these give the net cash provided (used) in operating activities.

Keep in mind that these formulas only work if accounts receivable is only used for credit sales and accounts payable is only used for credit account purchases.

An example of a Cash Flow Statement Direct Method computed with the above formulas looks something like below.

As you can see above, the Cash Flow Statement Direct Method reveals a great deal of detail about Cash Flows of a Company such as the Cash it pays to Suppliers and Employees, Income Tax Payments etc.

Fortunately, the calculation of the other two types of Cash Flow i.e. The Cash Flow from Investing and Financing are similar across all companies and much more straightforward.

It is only in the calculation of the Cash Flow from Operations that the company accountants must make a choice between the Direct Method and the Indirect Method.

Apart from this, Accountants are also required to prepare a reconciliation of net income and net cash flow from operating activities in a separate schedule.

As a result, due it's laborious nature, it is NOT the preferred choice for most Accountants and sparingly seen in Cash Flow Statements.

There are two ways to calculate the Cash Flow from Operations which are the Direct Method and the Indirect Method.

The Direct Method or the Indirect Method only apply to the Cash Flow from Operations and do not effect the Cash Flow from Investing or Cash Flow from Financing sections of the Cash Flow Statement.

The Direct Method is the preferred method by FASB but due to its laborious nature, most Accountants prefer the Indirect Method.

In theory, the Cash Flow Statement should be the most straightforward.

After all, it's just Cash inflows minus Cash Outflows, right?

Reality though is a bit different.

The Cash Flow Statement takes time to understand and master so if you stumble a bit in learning it, it's OK, we've all been there.

If your wondering what to learn next - The Cash Flow Statement would be a great article to read or just check out whatever you like on the Search box on top of the page.

If you want a multi media learning experience with a dash of humor and fun, check out our video course.

The content provided on accountingsuperpowers.com and accompanying courses is intended for educational and informational purposes only to help business owners understand general accounting issues. The content is not intended as advice for a specific accounting situation or as a substitute for professional advice from a licensed CPA. Accounting practices, tax laws, and regulations vary from jurisdiction to jurisdiction, so speak with a local accounting professional regarding your business. Reliance on any information provided on this site or courses is solely at your own risk.

Tax and accounting rules and information change regularly. Therefore, the information available via this website and courses should not be considered current, complete or exhaustive, nor should you rely on such information for a particular course of conduct for an accounting or tax scenario. While the concepts discussed herein are intended to help business owners understand general accounting concepts, always speak with a CPA regarding your particular financial situation. The answer to certain tax and accounting issues is often highly dependent on the fact situation presented and your overall financial status.