The direct method also converts all remaining items on the income statement to a cash basis. If accounts receivable increased by $5,000, cash collections from customers would be $95,000, calculated as $100,000 – $5,000. For instance, assume that sales are stated at $100,000 on an accrual basis. The direct method converts each item on the income statement to a cash basis. The American Institute of Certified Public Accountants reports that approximately 98% of all companies choose the indirect method of cash flows. Whenever given a choice between the indirect and direct methods in similar situations, accountants choose the indirect method almost exclusively. 95 encourages use of the direct method but permits use of the indirect method. The Statement of Financial Accounting Standards No. Alternatively, the indirect method starts with accrual basis net income and indirectly adjusts net income for items that affected reported net income but did not involve cash. This method converts each item on the income statement directly to a cash basis. The direct method deducts from cash sales only those operating expenses that consumed cash. You can calculate these cash flows using either the direct or indirect method. Cash flows from operating activities show the net amount of cash received or disbursed during a given period for items that normally appear on the income statement.
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