Acca financial Accounting (FA) Study Text ac ca (FA)

Chapter 19 

KAPLAN PUBLISHING

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4 

Cash generated from operations 

There are two methods of presenting cash flows from operations. You need to 

understand both methods of presentation and be able to apply either method in 

the examination if required. 

The direct method provides more detailed information and is based upon cash 

flow information extracted directly from the accounting records. As this method 

discloses information that would otherwise remain confidential, most business 

entities do not use the direct method. 

Example using the direct method 

Example of calculations using direct method 

The gross cash flows necessary for the direct method can be derived: 

1 

from the accounting records of the entity by totalling the cash 

receipts and payments directly, or 

2 

from the opening and closing statements of financial position and 

statement of profit or loss for the year by constructing summary 

control accounts for: 

–

sales (to derive cash received from customers)

–

purchases (to derive cash payments to suppliers)

–

wages (to derive cash paid to and on behalf of employees).