Cash Flow Statement Indirect Method
The statement of cash flows is one of the components of a company's set of financial
statements, and is used to reveal the sources and uses of cash by a business. It presents
information about cash generated from operations and the effects of various changes in the
balance sheet on a company's cash position.
Under the indirect method of presenting the statement of cash flows, the presentation of this
statement begins with net income or loss, with subsequent additions to or deductions from
that amount for non-cash revenue and expense items, resulting in net income provided by
operating activities.
The format of the indirect method appears in the following example. In the presentation
format, cash flows are divided into the following general classifications:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
The indirect method of presentation is very popular, because the information required for it is
relatively easily assembled from the accounts that a business normally maintains in its chart
of accounts. The indirect method is less favored by the standard-setting bodies, since it does
not give a clear view of how cash flows through a business (as is shown under the direct
method of presentation).
Statement of Cash Flows Indirect Method Example
For example, Lowry Locomotion constructs the following statement of cash flows using the
indirect method:
Lowry Locomotion
Statement of Cash Flows
for the year ended 12/31x1
Cash flows from operating activities
Net income
Adjustments for:
$3,000,000
Depreciation and amortization
Provision for losses on accounts receivable
Gain on sale of facility
$125,000
20,000
(65,000)
80,000
Increase in trade receivables
(250,000)
Decrease in inventories
325,000
Decrease in trade payables
(50,000)
25,000
Cash generated from operations
3,105,000
Cash flows from investing activities
Purchase of property, plant, and equipment
Proceeds from sale of equipment
(500,000)
35,000
Net cash used in investing activities
(465,000)
Cash flows from financing activities
Proceeds from issue of common stock
150,000
Proceeds from issuance of long-term debt
175,000
Dividends paid
(45,000)
Net cash used in financing activities
280,000
Net increase in cash and cash equivalents
2,920,000
Cash and cash equivalents at beginning of period
2,080,000
Cash and cash equivalents at end of period
Related Topics
Statement of cash flows overview
Direct method
How to prepare a cash flow statement
$5,000,000
Cash Flow Statement Direct Method
The direct method of presenting the statement of cash flows presents the specific cash flows
associated with items that affect cash flow. Items that typically do so include:
Cash collected from customers
Interest and dividends received
Cash paid to employees
Cash paid to suppliers
Interest paid
Income taxes paid
The advantage of the direct method over the indirect method is that it reveals operating cash
receipts and payments.
The standard-setting bodies encourage the use of the direct method, but it is rarely used, for
the excellent reason that the information in it is difficult to assemble; companies simply do
not collect and store information in the manner required for this format. Using the direct
method may require that the chart of accounts be restructured in order to collect different
types of information. Instead, they use the indirect method, which can be more easily derived
from existing accounting reports.
Statement of Cash Flows Direct Method Example
Lowry Locomotion constructs the following statement of cash flows using the direct method:
Lowry Locomotion
Statement of Cash Flows
for the year ended 12/31/x1
Cash flows from operating activities
Cash receipts from customers
$45,800,000
Cash paid to suppliers
(29,800,000)
Cash paid to employees
(11,200,000)
Cash generated from operations
4,800,000
Interest paid
(310,000)
Income taxes paid
(1,700,000)
Net cash from operating activities
$2,790,000
Cash flows from investing activities
Purchase of property, plant, and equipment
Proceeds from sale of equipment
(580,000)
110,000
Net cash used in investing activities
(470,000)
Cash flows from financing activities
Proceeds from issuance of common stock
1,000,000
Proceeds from issuance of long-term debt
500,000
Principal payments under capital lease obligation
(10,000)
Dividends paid
(450,000)
Net cash used in financing activities
1,040,000
Net increase in cash and cash equivalents
3,360,000
Cash and cash equivalents at beginning of period
1,640,000
Cash and cash equivalents at end of period
$5,000,000
Reconciliation of net income to net cash provided by operating activities:
Net income
$2,665,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Provision for losses on accounts receivable
Gain on sale of equipment
$125,000
15,000
(155,000)
Increase in interest and income taxes payable
32,000
Increase in deferred taxes
90,000
Increase in other liabilities
18,000
Total adjustments
Net cash provided by operating activities
Related Topics
Statement of cash flows overview
Direct method
How to prepare a cash flow statement
What is a funds flow statement?
125,000
$2,790,000
