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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:
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
$125,000
20,000
(65,000)
80,000
(250,000)
Decrease in inventories
325,000
(50,000)
25,000
3,105,000
(500,000)
35,000
(465,000)
150,000
175,000
Dividends paid
(45,000)
280,000
2,920,000
2,080,000
Related Topics
Statement of cash flows overview
Direct method
How to prepare a cash flow statement
$5,000,000
Interest 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
$45,800,000
(29,800,000)
(11,200,000)
4,800,000
Interest paid
(310,000)
(1,700,000)
$2,790,000
(580,000)
110,000
(470,000)
1,000,000
500,000
(10,000)
Dividends paid
(450,000)
1,040,000
3,360,000
1,640,000
$5,000,000
$2,665,000
$125,000
15,000
(155,000)
32,000
90,000
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