
Statement of
Direct method: This method uses the basis of cash for preparing the cash flows statement.
Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company. In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.
Cash Receipts: It encompasses all the cash receipts from sale of goods and on
Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.
Cash flows from operating activities (Direct method) |
Add: Cash receipts. |
Cash receipt from customer |
Less: Cash payments: |
To supplier |
For operating expenses |
Income tax expenses |
Net cash provided from or used by operating activities |
The below table shows the way of calculation of cash flows from operating activities:
To Determine: The disadvantage of the direct method of reporting cash flows from operating activities.

Explanation of Solution
- The main disadvantage is that the cash receipts and cash payments data’s might not be readily available in the accounting records.
- This method (direct method) not frequently prepared or used in practice.
- The required data to calculate operating activities section will be an expensive one and it is a time –consuming process.
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