To reconcile the amount of sales revenue reported on the income statement to the cash collected from sales, calculate the maximum amount of cash that could have been collected this period (potential cash collected) by combining (a) the amount that was due from customers on the first day of the period (beginning accounts receivable) and (b) total sales revenue recorded this period. Cash Collected from CustomersĬash collected from customers is different from the sales revenue that is recorded on the accrual basis financial statements. In the following section, we demonstrate the calculations needed to assess the component pieces of the operating section using the direct approach. Revenue and expense items that are not related to those current asset and liability accounts would not need an adjustment. This is accomplished by adjusting the accrual amount for the revenue or expense by any related current operating asset or liability. The direct approach requires that each item of income and expense be converted from the accrual basis value to the cash basis value for that item. The difference is just in the way that net cash flows from operating activities are calculated and presented.
(attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)Īs previously mentioned, the net cash flows for all sections of the statement of cash flows are identical when using the direct method or the indirect method.