Direct method (cash flow statement)

The direct method presents operating cash flow by listing actual cash receipts from customers and cash payments to suppliers and employees, unlike the indirect method, which adjusts net profit for non-cash items.

ByHoang TruongUpdated July 5, 2026

FrameworkIAS 7

See it move

Loading infographic...

A company collects €185,000 in cash from customers, after receivables rose €15,000. It pays €110,000 to suppliers, after payables rose €10,000, then €40,000 of other operating expenses in cash. Net cash from operating activities is €185,000 minus €110,000 minus €40,000, or €35,000.

Where it fits

SubjectFinancial AccountingAdvancedTopicThe Financial StatementsAdvanced

The formula

LaTeX

\text{Cash from customers} = \text{Revenue} - \Delta AR

Variables

$R e v e n u e$: Sales revenue recognised for the period (€)
$Δ A R$: Increase in trade receivables over the period (subtract; a decrease is added instead) (€)

Converts accrual sales revenue into the cash actually collected during the period.

LaTeX

\text{Cash to suppliers} = \text{Purchases} - \Delta AP

Variables

$P u r c ha ses$: Purchases or cost of goods sold recognised for the period (€)
$Δ A P$: Increase in trade payables over the period (subtract; a decrease is added instead) (€)

Converts accrual purchases into the cash actually paid out to suppliers during the period.