## Cash Flow from Operating Activities — Direct Method

Under the direct method, actual cash receipts and payments are reported line by line. You do not start from profit.

### Standard Format

Item	₹
Cash sales	xx
Cash collected from trade receivables	xx
Total Cash Inflows	xx
Cash paid to trade payables (goods)	(xx)
Cash paid to suppliers (consumables)	(xx)
Cash paid to employees	(xx)
Income tax paid	(xx)
Net CF from Operating Activities	xx

### Deriving "Cash Paid to Trade Payables" — The Ledger Approach

When only total purchases and opening/closing balances are given, split purchases into cash and credit, then use the Trade Payables ledger:

```

Trade Payables Account

─────────────────────────────────────────────

Dr | Cr

Cash paid [PLUG] | Opening balance

Closing balance | Credit purchases

─────────────────────────────────────────────

```

Cash paid to suppliers = Opening TP + Credit Purchases − Closing TP

### When the Direct Method Cannot Be Applied

If the opening balance of Trade Receivables is not given, the Debtors ledger cannot be prepared, and therefore "cash collected from customers" cannot be derived. In such cases, direct method cannot be applied for the collections figure — use figures already available or switch to indirect method.

### Full Statement Layout (condensed)

```

A. CF from Operating Activities xx

B. CF from Investing Activities

Purchase of machinery (cash) (xx)

Proceeds from sale of investments xx

C. CF from Financing Activities

Redemption of preference shares (xx)

Issue of equity shares (incl. prem.) xx

Dividend paid (xx)

Interest paid on debentures (xx)

─────────────────────────────────────────────

Net CF during the year (A+B+C) xx

Opening CCE xx

Closing CCE xx

```

Worked example

### Example 1

Deriving cash paid to trade payables:

Given: Total purchases = ₹440, Cash purchases (TOCIB) = ₹88 → Credit purchases = ₹352

Opening TP = ₹168, Closing TP = ₹336

```

Trade Payables Account

──────────────────────────────────────

Cash paid (plug): 184 | Opening: 168

Closing balance: 336 | Credit purch: 352

─────| ─────

520 | 520

```

Cash paid to trade payables = 168 + 352 − 336 = ₹184

⚠️ Common exam mistakes

Treating total purchases as cash purchases — always split into cash and credit portions first.
Forgetting that the direct method requires both opening and closing balances of debtors/creditors to prepare the ledger; if opening balance is missing, the ledger cannot be balanced.
Including non-cash items (e.g., goods received but not yet paid) in cash outflows.
Netting cash inflows and outflows instead of disclosing them gross (AS 3 requires gross disclosure for operating items).

Bare-Act text Paragraph 18 · AS 3 (Revised) — Cash Flow Statements · click to expand

An enterprise should report cash flows from operating activities using either: (a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or (b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

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Cash Flow Statement — Direct Method (Operating Activities)

Worked example

⚠️ Common exam mistakes