Under the Direct Method, Net cash provided or used by operating activities is computed by adjusting each item in the income statement from an accrual basis to the cash basis. All the operating cash receipts and cash payments are reported.
Work Step by Step
Difference amount between the cash receipts from customers and cash payments to suppliers is the net cash provided by operating activities. Depreciation expense is a non cash charge and so therefore it is not shown on a statement of cash flows under the direct method If the amount for operating expenses includes depreciation expense, operating expenses must be reduced by the amount of depreciation or other non-cash expenses to determine cash payment for operating expenses.