Question

when finished goods inventory is considered for direct method in cash flow

Answer 1

Cash flow statement prepared under the indirect method can be converted to the cash flow statement under the direct method. All we need to do is to translate the cash flows from operating activities section from reconciliation format to the cash inflows and outflows format.

Cash collections from customers equal opening balance of receivables plus revenue minus closing balance of receivables.

Cash paid for inventories can be determined by first finding out the inventories purchased. Inventories purchases equal closing balance of inventories plus cost of goods sold (excluding any non-cash items such as depreciation) minus the opening balance of inventories. Cash paid to suppliers equals the opening balance of accounts payable plus inventory purchases minus the closing balance of accounts payable.

Cash paid for other operating expenses equals opening accrued expenses plus closing prepayments plus operating expenses minus closing accrued expenses minus opening prepayments.
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