Crash Course in Accounting and Financial Statement Analysis, Second Edition

Direct Method

As discussed in Chapter 7, we know that the cash flow statement is designed for the purpose of tracing a company’s cash flows and their sources/uses. Accordingly, under the direct method of preparing the cash flow from operating activities section, each income statement line item—revenues, cost of goods sold (COGS), selling, general and administrative (SG&A), interest expense, income taxes, etc.—is converted from accrual to cash accounting (Exhibit A.3).

Exhibit A.3. Under the Direct Method, Each Income Statement Line Item is Converted From Accrual to Cash Accounting

CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions			fiscal year ended Dec. 31, 2005 (52 weeks)	fiscal year ended Jan. 1, 2005 (52 weeks)	fiscal year ended Jan. 3, 2004 (53 weeks)
Cash flows from operating activities:
	Cash receipts from sales		$ 36,923.1	$ 30,545.8	$ 26,276.9
	Cash paid for inventory		(26,403.9)	(22,469.2)	(19,262.9)
	Cash paid to other suppliers and employees		(8,186.7)	(6,528.5)	(5,475.5)
	Interest and dividends received		6.5	5.7	5.7
	Interest paid		(135.9)	(70.4)	(64.9)
	Income taxes paid		(591.0)	(569.2)	(510.4)
Net cash provided by operating activities			1,612.1	914.2	968.9
Cash flows from investing activities:
	Additions to property and equipment		(1,495.4)	(1,347.7)	(1,121.7)
	Proceeds from sale-leaseback transactions		539.9	496.6	487.8
	Acquisitions, net of cash and investments		12.1	(2,293.7)	(133.1)
	Cash outflow from hedging activities		—	(32.8)	—
	Proceeds from sale or disposal of assets		31.8	14.3	13.4
Net cash used in investing activities