Cash Flow Statement: Direct Method (NAS 07 / IAS 7)

Explanation

While the Profit and Loss Account measures profitability under accrual conventions (where non-cash revenues and expenses distort real liquidity), the Cash Flow Statement tracks genuine solvency. The Direct Method is explicitly mandated by Nepal Accounting Standard (NAS 07) and preferred by regulatory bodies because it clearly reveals gross operational cash collection efficiency.

Key points

• Operating Activities (Direct Method): Cash receipts from customers minus cash paid to suppliers, employees, operating expenses, and taxes.
• Investing Activities: Purchase and sale of long-term productive assets (Property, Plant, Equipment) and financial investments.
• Financing Activities: Proceeds from issuing shares, debentures, loan borrowings, repayment of debt principal, and dividend payments.
• Net Cash Flow = Operating CF + Investing CF + Financing CF. Closing Cash = Opening Cash + Net Cash Flow.

Example

Code examples

// Cash Flow Statement (Direct Method) Outline:
// A. CASH FLOW FROM OPERATING ACTIVITIES:
//    Cash receipts from customers (Sales - Increase in Debtors)
//    Less: Cash paid to suppliers (Purchases + Increase in Creditors - Increase in Stock)
//    Less: Cash paid to employees and operating expenses
//    Less: Income tax paid
//    = Net Cash Flow from Operating Activities
//
// B. CASH FLOW FROM INVESTING ACTIVITIES:
//    Purchase of Machinery / Fixed Assets (Outflow)
//    Sale of Old Equipment (Inflow)
//    = Net Cash Flow from Investing Activities
//
// C. CASH FLOW FROM FINANCING ACTIVITIES:
//    Issue of Share Capital (Inflow)
//    Repayment of Bank Loan (Outflow)
//    Dividend Paid (Outflow)
//    = Net Cash Flow from Financing Activities
//
// Net Increase / Decrease in Cash (A + B + C)
// + Opening Cash and Bank Balance
// = Closing Cash and Bank Balance (Reconciled with Balance Sheet)

Exam questions

• [10 Marks] Prepare a Cash Flow Statement using the Direct Method as per NAS 07 from two comparative Balance Sheets and an Income Statement.
• [7 Marks] Differentiate between Cash Flow Statement and Funds Flow Statement. Why is the Direct Method preferred by regulatory bodies?