Cash Flow Direct and Indirect Method Examples

As a core part of financial accounting, cash flow statement is a financial statement that directly reverts all the changes in your balance sheet to monitor the financial transactions and keeping the right record of every penny you transfer. You must understanding about the difference between direct or indirect cash flow methods. As mentioned in the name, clearly stating, cash flow statement show the eligible options and path for the in and out motion of money in the business. It contains all the possible adjustments of money which is being capitalized in your business. Few Microsoft Excel templates are used to calculate monthly financial figure in presentable mod.

This statement can be used as monitoring tool to judge the ability of company where the company has sufficient sources in hand for any major financial activity or else they have in hand sources to pay off the liabilities on time.

Cash flow direct vs indirect method

Purpose of Cash Flow Statement

As the linear part of financial account, state of cash flow was previously known as flow of cash statement.  Later the name bases were reviews and now it is known as Business financial managing tool. It depicts the measured comparison between the changes in balance sheet and companies efficient income sources. It has three fairly devised categories of investing activities, financial activities and operating activities.

1-      Operating activates include all the transactions related to the operating sector, sales and purchases of raw materials, and end product sale.

2-      Financial Activities of cash flow statement includes the financial transactions like loans, capital investments from partners and customers etc.

3-      Investing activities includes the budgetary investments of business like sale and purchase of assets of business and etc.

Direct VS. Indirect Cash Flow Methods

For preparing a clean pattern statement of cash flow, we have two mainly used methods states as below;

1-      Direct Cash Flow Method

Direct method states the arrangement of financial transaction in the timely order with each segment as a classified portion of investment in the business. It categorizes the transactions under specified groups of activities. Supposedly if taxes are pain in the business and they are directly linked with the operating activates, then they are mention in the section of operating cash flow, and if they are directly linked with financial activities, they are written in description with financial activities. With no longer alternate arrangement, if such transactions are linked with the investing activities in some genre, then they are clearly states as a part of investing activities. This method is comparatively easier than its alternate route.

cash flow direct method

2-      Indirect Cash flow Method

Indirect method is vastly used all around the world, though it is a bit complex method, yet it is used universally. Indirect method holds the start from net income of business and then starts categorizing the financial activities as non-cash based items and then cash based items. In case there occur an increase in the assets of business, then it is potentially subtracted from the net income and increase in liabilities is added in the net income of the business. By using this method, accruals based arrangement turn into income based arrangement by doing a couple additions and subtractions.

Following these two commonly used methods, statements for cash flow are prepared all over the world.

Benefits of Cash Flow Excel Templates

If you are preparing business accounting statement using business asserts, debits, loan, leasing and collecting other financial data so these excel templates for cash flow statement used for creating difference between both direct and indirect techniques.