What does the direct method start with when preparing the cash flow statement?

When preparing the cash flow statement using the direct method, the process begins with cash inflows and outflows directly related to operating activities, not with net income. The direct method identifies cash receipts from customers and cash payments to suppliers and employees, offering a straightforward view of cash flows.

The format typically involves listing cash collected from customers and cash paid for various expenses. This is in contrast to the indirect method, which starts with net income and adjusts for non-cash transactions and changes in working capital. By focusing on actual cash transactions, the direct method provides insight into a company's ability to generate cash from its operational core, thus presenting a clearer view of cash inflow and outflow during the reporting period.