ACX2100 Chap.2 Statement of Cash Flows: Direct Method Reconstruction
Statement of Cash Flows: Direct Method Reconstruction
The direct-method statement of cash flows reconstructs actual receipts and payments from accrual accounts. Operating activities include customer receipts and payments to suppliers, employees, landlords, lenders and the tax authority; this unit fixes interest paid as operating. Investing activities include purchases and disposals of non-current assets and interest received.
Financing activities include share issues, borrowings, principal repayments and dividends. Customer receipts roll accounts receivable from opening through credit sales to closing. Supplier payments require two bridges: inventory converts cost of goods sold into purchases, then accounts payable converts purchases into cash. Wages, rent, interest and tax use payable or prepayment roll-forwards.
Disposal proceeds are carrying amount plus a gain or minus a loss, never the gain or loss itself. Dividends require retained earnings to find the declaration and dividend payable to find the cash payment. The final proof reconciles opening cash through operating, investing and financing movements to closing cash.
The Week 2 lecturer case has damaged extracted digits and cross-unit provenance, so every free and paid model here uses fresh businesses and figures while preserving the taught method.
What this chapter covers
- 01
Purpose of cash-flow reporting
- 02
Operating, investing and financing classifications
- 03
Interest paid always operating in this unit
- 04
Customer-receipt reconstruction through receivables
- 05
Purchases through inventory and supplier cash through payables
- 06
Wage, rent, interest and tax payment roll-forwards
- 07
Asset disposal cost, accumulated depreciation, carrying amount and proceeds
- 08
Share, loan and dividend financing flows
- 09
Opening-to-closing cash proof
AskSia-authored practice — reconstruct operating cash and prove closing cash
- ReceiptsCustomer receipts = opening receivables $84,000 + credit sales $612,000 − closing receivables $97,000 = $599,000.
- PurchasesPurchases = closing inventory $58,000 + COGS $330,000 − opening inventory $50,000 = $338,000.
- SuppliersSupplier payments = opening payables $44,000 + purchases $338,000 − closing payables $49,000 = $333,000.
- OperatingOperating cash = $599,000 − $333,000 − $156,000 − $36,000 − $12,000 − $20,000 = $42,000 inflow.
- ProofNet increase = operating $42,000 − investing $22,000 + financing $15,000 = $35,000. Closing cash = opening $20,000 + $35,000 = $55,000.
Key terms
- Operating activities
- Principal revenue-producing activities and other cash flows not classified as investing or financing; interest paid is always operating in this unit.
- Investing activities
- Cash flows relating to acquisition and disposal of long-term assets and other investments, including interest received under the unit's classification.
- Financing activities
- Cash flows changing contributed equity and borrowings, including share issues, loans, principal repayment and dividends paid.
- Direct method
- Presentation of major classes of gross cash receipts and payments rather than reconciliation from profit.
- Reconstruction
- Using opening balance, accrual movement and closing balance to solve the unknown cash receipt or payment.
Statement of Cash Flows: Direct Method Reconstruction FAQ
Is interest paid operating or financing?
This unit applies a fixed teaching rule: interest paid is always classified as operating. Keep loan principal in financing.
Why is cost of goods sold not supplier cash?
COGS measures inventory consumed. First derive purchases using inventory, then derive supplier payments using accounts payable.
Is a gain on sale an investing inflow?
No. The investing inflow is the cash proceeds. Compute carrying amount from cost and accumulated depreciation, then add a gain or subtract a loss.
What is the fastest whole-answer check?
Opening cash plus the net operating, investing and financing movement must equal closing cash. Never plug a difference into another line.
Exam move
Memorise classifications as business stories rather than lists. Then practise five account identities: receivables, inventory, payables, expense payables and prepayments. For every disposal, write cost, accumulated depreciation, carrying amount, gain or loss and proceeds in that order. For dividends, use retained earnings before dividend payable. Assemble the statement only after the working accounts tie.
The published exam allocation is 10 marks, so rehearse compact working and preserve the closing-cash proof. Textbook Chapter 18 is background; the weekly page states that unit coverage is confined to lecture slides and practical exercises. Run each reconstruction twice.
First use T-accounts and mark every balance-sheet movement as opening, cash, non-cash or closing; then redo it with short equations so the faster method still has an audit trail. Reverse one movement deliberately—such as increasing receivables—and explain why cash receipts must move in the opposite direction. Keep gains and losses out of investing cash until the disposal working produces actual proceeds.
After assembling operating, investing and financing sections, perform both closing-cash and whole-statement proofs. A good final drill is to cover the classifications, read each transaction aloud as an operating story, asset transaction or financing decision, and justify the placement before revealing the answer.
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