What is Direct Method Cash Flow Statement?
The direct method presents the cash flow statement by listing actual operating cash inflows and outflows: cash received from customers, cash paid to suppliers, cash paid to employees and so on. It produces a more intuitive picture of operating cash flow but is less commonly used because it requires detailed cash records.
How It Works
- Aggregate all cash collections from customers during the period.
- Aggregate all cash paid to suppliers, employees and for operating expenses.
- Subtract outflows from inflows to get net cash from operating activities.
- Disclose a reconciliation to net income in the notes if required.
Saudi Context
A small but growing number of Saudi family businesses use the direct method internally because owners find it easier to read than the indirect approach.
Example
If cash received from customers is SAR 300 million and total operating cash payments are SAR 220 million, operating cash flow is SAR 80 million.