## Cash Flow from Operating Activities: Direct Method

The direct method shows actual cash inflows and outflows — no adjustments to profit. Each line is computed by constructing a T-account (ledger) for the relevant balance-sheet item.

### Format

```

A. Cash Flow from Operating Activities (Direct Method)

Cash received from customers (TR) ×××

Less: Cash paid to suppliers (TP) (×××)

Less: Employee Benefits Expense paid (×××)

Less: Other operating expenses paid (×××)

Cash generated from Operations ×××

Less: Income Tax Paid (net) (×××)

Net CF from Operating Activities ×××

```

### How to compute each figure using ledger accounts

#### 1. Cash received from Trade Receivables

```

Trade Receivables A/c

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

Credit Sales ××× | Closing balance ×××

```

Cash received = Opening TR + Credit Sales − Closing TR

#### 2. Cash paid to Trade Payables

```

Trade Payables A/c

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

Closing balance ××× | Credit Purchases ×××

```

Cash paid = Opening TP + Credit Purchases − Closing TP

#### 3. Employee Benefits Expense (Wages) Paid

```

Outstanding Wages A/c

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

Closing outstanding ××× | P&L — EBE charge ×××

```

Cash paid = Opening Outstanding + EBE per P&L − Closing Outstanding

#### 4. Income Tax Paid — Combined Provision + Advance Tax Ledger

```

Provision for Tax + Advance Tax (Combined Ledger)

Opening Advance Tax ××× | Opening Provision for Tax ×××

Tax Paid (bal fig) ××× | P&L — Current Tax charge ×××

Closing Provision ××× | Closing Advance Tax ×××

```

This combined ledger automatically nets advance tax against provision.

Worked example

### Example 1

Illustration 10 — Direct Method

Given data:

Cash received from TR = ₹4,000
Cash paid to TP = ₹2,380
EBE paid = ₹790

Trade Payables ledger working:

```

Trade Payables A/c

CIB (cash paid) 2,380 | Opening balance 230

Closing balance 250 | Purchases 2,400

----- -----

2,630 2,630

```

Combined Provision for Tax + Advance Tax ledger:

```

Opening Advance Tax 180 | Opening Provision 180

Tax Paid (bal fig) 195 | P&L Tax charge 200

Closing Provision 200 | Closing Advance Tax 195

---- ----

575 575

```

∴ Income Tax Paid = ₹195

Outstanding Wages (EBE) ledger:

```

Cash paid (EBE) 800−50+40 = 790 | Opening O/S wages 40

Closing O/S wages 50 | P&L — EBE 800

```

Cash EBE paid = Opening 40 + P&L 800 − Closing 50 = ₹790

Final statement:

```

Cash received from customers (TR) 4,000

Less: Cash paid to suppliers (TP) (2,380)

Less: EBE paid (790)

Less: Other expenses paid ×××

Less: Income tax paid (195)

Net CF from Operating Activities ×××

```

⚠️ Common exam mistakes

Using P&L figures directly instead of constructing ledger accounts — this gives the accrual amount, not cash paid/received.
Forgetting to combine Advance Tax and Provision for Tax into one ledger — netting them incorrectly gives wrong tax paid.
Mixing up the direction of the combined tax ledger: advance tax is an asset (debit side), provision is a liability (credit side).
Trying to interlink or reconcile direct and indirect method calculations within the same solution — solve independently.

Bare-Act text Paragraph 19 · AS 3 — Cash Flow Statements · click to expand

Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: (a) from the accounting records of the enterprise; or (b) by adjusting sales, cost of sales and other items in the statement of profit and loss for: (i) changes during the period in inventories and operating receivables and payables; (ii) other non-cash items; and (iii) other items for which the cash effects are investing or financing cash flows.

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Cash Flow from Operating Activities — Direct Method

Worked example

⚠️ Common exam mistakes