prepare statement of cash flow using direct method

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prepare statement of cash flow using direct method. Direct method generates the operating cash flow in a different format from the indirect that we discussed. Indirect method is a much more popular and common way of preparing statement of cash flow. The difference is, using indirect we reconcile net income to operating cash flow. Using direct, we directly indicate where the operating cash is from, then add them up. In question 1 (direct method), you need follow the following steps to find the cash from operating activities: Cash Receipts from customers Less: cash payments = Cash provided by Operating Activities Under "cash payments", there are the following subcategories: To suppliers For income taxes For operating expenses For interest You may find the information from the balance sheet and income statement. For instance: Cash receipts from customers = Sales - Increase in AR Cash payments to suppliers = COGS + Increase in Inventory - Increase in AP Note that COGS + Increase in Inventory = Total cost of purchase, then subtract increase in AP, which is the noncash purchase Cash payments for operating expense = Total Operating Expense (exclusive of depreciation) + Ending Prepaid Expenses - Beginning Prepaid Expenses + Beginning Accrued Expenses - Ending Accrued Expenses. In another word, cash payments for operating expense = Operating Expense + Increase (- Decrease) of Prepaid + Increase (- Decrease) of Accrued Expense. This is because, when prepaid increased, that means more cash paid for operating purpose (DR. Prepaid Expense CR. Cash). When accrued payable decreased, that means more cash paid to satisfy the short-term operating liabilities (DR. Accrued Payable CR. Cash) The investing activities and financing activities are the same as indirect method. Condensed financial data of Harley Corp. Follow. Question 2: to prepare statement of cash flow using indirect method. A tip: gain from sales of investments need to be deducted from "Net Cash Provided by Operating Activities" to avoid double counting that amount, since this is included in the net income, and you will have to include this gain in the investing activities.