How to Prepare a Statement of Cash Flows | Principles of Accounting | Summary and Q&A

TL;DR

Learn how to prepare the statement of cash flows using the indirect method, adjusting net income for non-cash items.

Key Insights

• 💐 The indirect method adjusts net income to obtain net cash flow from operating activities in the statement of cash flows.
• 💱 Changes in accounts receivable, inventory, and accounts payable require adjustments to reflect the cash impact in the statement.
• 🪐 The indirect method allows for a reconciliation between net income (an accrual amount) and net cash flow from operating activities (a cash basis amount).
• 💐 The statement of cash flows also includes sections on cash flows from investing activities and financing activities.
• 📼 Investing activities involve cash inflows from asset sales and cash outflows from asset purchases.
• ❓ Financing activities include cash inflows from equity and debt issuances, as well as cash outflows from dividends and debt repayments.

Transcript

preparing the statement of cash flows through the indirect method begins with net income net income which is an accrual amount is then adjusted to obtain net cash flow from operating activities which is a cash basis amount adjustments whether additions or subtractions are necessary for each item on the income statement that does not wholly or parti... Read More

Questions & Answers

Q: What is the purpose of preparing the statement of cash flows through the indirect method?

The indirect method adjusts net income for non-cash items to provide a clearer picture of the cash flows generated by a company's operating activities.

Q: How are adjustments for non-cash items made in the statement of cash flows?

Adjustments are made by adding back depreciation expense and subtracting changes in accounts receivable, inventory, and accounts payable from net income.

Q: What information is required from the income statement and balance sheet to prepare the statement of cash flows?

The income statement provides details such as net income and depreciation expense, while the balance sheet helps determine changes in accounts receivable, inventory, and accounts payable.

Q: How is the net cash flow from operating activities calculated using the indirect method?

Net cash flow from operating activities is calculated by adjusting net income for non-cash items, such as depreciation expense and changes in accounts receivable, inventory, and accounts payable.

Summary & Key Takeaways

• The statement of cash flows through the indirect method starts with net income and adjusts it to obtain net cash flow from operating activities.

• Adjustments are made for non-cash items on the income statement, such as depreciation expense and changes in accounts receivable, inventory, and accounts payable.

• Information from the income statement and balance sheet is utilized to compute these adjustments and prepare the statement of cash flows.