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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