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The Direct Method of Determining the Net Cash Provided by Operating Activities Appendix 14A

14A-2

Learning Objective 4

Use the direct method to determine the net cash provided by operating

activities.

14A-3

Computing Net Cash Provided by Operating Activities

The direct method computes net cash provided by operating activities by reconstructing the

income statement on a cash basis from top to bottom.

Net cash provided by operating activities under the direct method will

always agree with the amount computed using the indirect method.

14A-4

Similarities and Differences in the Handling Data

Adjustments for accounts that affect revenue are the

same in the direct and indirect methods.

Adjustments for accounts that affect expenses are

handled in opposite ways for the direct and indirect

methods.

14A-5

Similarities and Differences in the Handling Data

Under the direct method, no adjustments for gains and losses on the sale of

assets are needed.

14A-6

Special Rules—Direct and Indirect Methods

Requires a reconciliation between net

income and the net cash provided by

operating activities

Direct Method

Requires disclosure of

amount of interest and income taxes

paid during the year

Indirect Method

14A-7

End of Appendix 14A