Introduction to Indirect Method of Preparing a Statement of Cash Flows

What you will learn to do: Understand how a statement of cash flows is prepared using the indirect method

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Cash flows from operating activities show the net amount of cash received or disbursed during a given period for items that normally appear on the income statement. You can calculate these cash flows using either the direct or indirect method. The direct method deducts from cash sales only those operating expenses that consumed cash. This method converts each item on the income statement directly to a cash basis. Alternatively, the indirect method starts with accrual basis net income and indirectly adjusts net income for items that affected reported net income but did not involve cash.

Cash flows from investing and financing are prepared the same way under the direct and indirect methods for the statement of cash flows.

Here is our statement of cash flows for Rumble Corp. prepared using the indirect method:

Rumble Corp.
Statement of Cash Flows
for the year ended 12/31/x1
Description Amount Total
In millions
Subcategory, Cash flows from operating activities
Net income $ 2,610
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 125
Decrease in Accounts Receivable 15
Gain on sale of equipment (90)
Increase in Accounts Payable 32
Increase in income taxes payable 80
Increase in other liabilities 18
Total adjustments 180
Net cash from operating activities Single Line Single Line
Subcategory, Cash flows from investing activities
Purchase of property, plant, and equipment (580)
Proceeds from sale of equipment 150
Net cash used in investing activities Single Line Single Line
Subcategory, Cash flows from financing activities
Proceeds from issuance of common stock 1,000
Proceeds from issuance of long-term debt 500
Dividends paid (460)
Net cash used in financing activities Single Line Single Line
Net increase in cash and cash equivalents 3,400
Cash and cash equivalents at beginning of period 1,640
Cash and cash equivalents at end of period Single Line
Double Line
Supplemental information:
Cash paid for interest $ 310
Cash paid for income taxes $ 1,700

Only the top section entitled “Cash flows from operating activities” is different.

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