Direct method

1
Direct method - Convert income statement into
cash basis - Adjust for changes in B/S items
bet. 2 periods.
Items from income statement
Operating act.
CA (excluded cash cash equivalent)
CL (excluded S-T bank debt)
LL (included bank debt) CS Surplus (Excluded
Re.) Cash dividends
Investing act.
Long term assets (FA, L-T investment, other non CA
Financing act.
SOURCES increase liabilities, decrease asset
USES decrease liabilities, increase asset
2
Cash receipt from sales (sales adj. with ?
AR) Cash purchases (COGS adj. with ?Inv., ? AP)
Cash margin Cash operating exp. (OP. exp. -
adj. with depreciation amortization, ? prepaid
expenses, ? accruals) Cash operating
profit Other exp. Cash before IT Interest
expense Income tax ? interest payable ?
Income tax payable ? other CA CL CFO ? LA
(Capital expenditures, ? L-T investment, ? other
non CA) CFI ? LL Cash dividends ? Bank debt ?
CS Surplus CFF Changes in cash and cash
equivalent