## Cash Flow from Operating Activities — Direct Method

The direct method discloses the actual gross cash receipts and payments from each major class of operating activity. No starting from PBT — you build from scratch using ledger reconstruction.

### Standard Template

```

A. Cash Flow from Operating Activities (Direct)

Cash received from customers (Trade Receivables) ×××

Less: Cash paid to suppliers (Trade Payables) (×××)

Less: Cash paid for employee benefits (wages) (×××)

Less: Cash paid for other operating expenses (×××)

Less: Income tax paid (×××)

------

Net Cash from Operating Activities ×××

```

### How to reconstruct each figure using T-accounts

Cash received from customers:

```

Trade Receivables Ledger

Opening TR ××× | Cash received (bal fig) ×××

Credit Sales ××× | Closing TR ×××

```

Formula: Cash received = Opening TR + Credit Sales − Closing TR

Cash paid to suppliers:

```

Trade Payables Ledger

Cash paid (bal fig) ××× | Opening TP ×××

Closing TP ××× | Purchases ×××

```

Formula: Cash paid = Opening TP + Purchases − Closing TP

Cash paid for expenses (e.g., wages):

```

Wages/EBE Ledger

Cash paid (bal fig) ××× | Opening accrual ×××

Closing accrual ××× | P&L charge ×××

```

Formula: Cash paid = Opening accrual + P&L charge − Closing accrual

### Critical exam rule

> When a question asks for cash flow under both direct and indirect methods, solve them as two completely independent sub-questions. Never try to cross-link or verify one against the other mid-solution — this causes cascading errors.

Worked example

### Example 1

Illustration 10 — Direct Method

Given data:

Cash received from customers (TR): ₹4,000
Trade Payables: Opening ₹230, Closing ₹250; Purchases ₹2,400
Wages EBE: Opening accrual ₹40, P&L charge ₹800, Closing accrual ₹50
Other expenses: Opening prepaid ₹10, P&L ₹200, Closing prepaid ₹20
Tax: Opening Provision ₹180, P&L charge ₹200, Closing Provision ₹200; Opening Advance Tax ₹180, Closing Advance Tax ₹195

Step 1 — Cash paid to TP:

```

TP Ledger:

Cash paid (bal) 2,380 | Opening TP 230

Closing TP 250 | Purchases 2,400

```

Cash paid to suppliers = ₹2,380

Step 2 — Cash paid for wages:

```

Wages Ledger:

Cash paid (bal) 790 | Opening accrual 40

Closing accrual 50 | P&L EBE 800

```

Cash paid for wages = ₹790

Step 3 — Tax paid (combined ledger):

```

Opening Advance Tax 180 | Opening Provision 180

Tax paid (bal fig) 195 | P&L provision 200

Closing Provision 200 | Closing Adv Tax 195

```

Tax paid = ₹195

Result:

```

Cash received from customers 4,000

Less: Cash paid to suppliers (2,380)

Less: Cash paid for wages (790)

Less: Income tax paid (195)

------

Cash from Operating Activities 635 (approx)

```

⚠️ Common exam mistakes

Using the Purchases figure directly as 'cash paid to suppliers' — must adjust for opening/closing Trade Payables
Using the P&L expense as 'cash paid for expenses' — must adjust for opening/closing accruals and prepayments
Trying to interlink direct method figures with indirect method to 'verify' — solve each independently
Forgetting to include Sales returns / Purchase returns when adjusting TR/TP ledgers if mentioned

Bare-Act text Paragraph 18(a), AS 3 · Accounting Standard 3 — Cash Flow Statements (ICAI) · click to expand

The direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.

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