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2.4.1 Direct method
Basically,
by
using
direct
method
for
reporting statement
of
cash,
an
entity is
analyzing the total cash on hand and bank balances to identify the cash flow
during
the
period.
When
referring
to paragraph 18 of
IAS
7,
direct
method
is
the
format
which
is
suggested
for
entity to
report
its
cash
flow
due
to
its
capability to provide useful information which can be used to analyze and
estimate
future cash
flow and which
is
not available
in the cash
flow
reporting
when using indirect method. Again when referring paragraph 18 of IAS 7
(Alfredson et al. 2005, p.593), direct method
is
described
as
a
method
where
classes of gross cash payment and receipts are disclosed. The following steps
should be done in applying the direct method (Weygandt et al, 2007, p.741):
Step 1: Operating activities
If the company decides to use direct method, the company should calculate
the
net
cash
provided
in
the
operating
activities by
adjusting
each
item
in
the
income
statement
from
the
accrual
to cash
basis.
Only
major
classes
of
operating cash receipts and payments are reported in order to simplify and
condense the operating activities.
The
net cash provided (used)
in
the operating
activities
is
resulted
from the
difference
between
cash
receipts
and
cash
payments. On the other hand, the most efficient way to apply the direct method
is
analyzing
the
income
statement
items
in
the
order
in
which
they
are
listed.
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