## Preparing a Statement of Cash Flow

### Learning Objectives

• Prepare a statement of cash flow using the indirect method

Ok, so let’s put together all of the great stuff we have learned about cash flow! A reminder the indirect method is working from the bottom of the income statement and adjusting it to the cash basis. So we would take the net income, and work from there.

So here is our income statement on the accrual basis:

Income Statement
Month ended 1/31/XX
Accrual Basis
Income
Sales 25000
Expenses
Rent 1000
Utilities 1000
Supplies 1250
Payroll 5000
Depreciation 4000
Other Expenses 2500
10250

Our net income is $10,250, so we will start there and work up to our cash flow statement The first step is to add back our depreciation, because that is a non-cash expense!  Net Income 10250 4000 14250 This balance will move to the cash flow statement! The second step is to analyze the net changes in the balance sheet accounts that we discussed earlier. Accounts receivable, accounts payable and the other current assets and liabilities will also affect the cash flow of the company. So let’s assume the following changes: 1/1/XX 1/31/XX Accounts Receivable 5000 4000 decrease 3000 5000 increase 2500 3850 increase 1000 500 decrease This information will come in handy in the next step! So how do these items affect cash? Going back to our chart from our discussion about indirect cash flow analysis we know that:  If the account balance increases If the account balance decreases Current Assets Accounts Receivable (money from customers) Subtract Add Inventory (buy or pay for inventory) Subtract Add Prepaid expenses (insurance) Subtract Add Current Liabilities Accounts Payable (pay your bills) Add Subtract Accrued Liabilities (payroll) Add Subtract Income taxes payable (tax payments) Add Subtract So, here is the final deal! Cash Flow Statement: Operating Activities-Indirect Method  1/1/XX 1/31/XX Accounts receivable$5,000 $4,000 decrease Inventory$3,000 $5,000 increase Accounts payable$2,500 $3,850 increase Income taxes payable$1,000 $500 decrease Beginning cash$14,250 Decrease in accounts receivable $1,000 increase cash Increase in inventory ($2,000) decrease cash Increase in accounts payable $1,350 increase cash Decrease in income tax payable ($500) decrease cash Net change in cash ($150) Ending cash$14,100

So the income statement and balance sheet only show part of the picture. A company can have awesome sales, but if they struggle to collect on their accounts receivable, they may have issues with their cash flow! It is important as a manager to look at the big picture, in order to find ways to increase profits and create a positive cash flow!