Putting It Together: Statement of Cash Flows

Just for comparative purposes, let’s take one last look at Rumble Corp.’s statement of cash flows under both the direct and indirect methods.

First, the direct 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
Cash receipts from customers $ 45,800
Cash paid to suppliers (29,800)
Cash paid to employees (11,200)
Cash generated from operations Single Line
4,800
Interest paid (310)
Income taxes paid (1,700)
Net cash from operating activities Single Line Single Line
$2,790
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
(430)
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
1,040
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
$5,040
Double Line
Reconciliation of net income to net cash provided by 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
$2,790

Next, 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
$2,790
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
(430)
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
1,040
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
$5,040
Double Line
Supplemental information:
Cash paid for interest $ 310
Cash paid for income taxes $ 1,700

The only real difference is that the direct method reports cash flows from operations as if we’d been recording sales, purchases, and other expenses using the cash basis of accounting, which is the advantage of the direct method over the indirect method: the direct method shows operating cash receipts and payments.

A business man sitting at his laptop.The Statement of Financial Accounting Standards No. 95 encourages use of the direct method but permits use of the indirect method. Whenever given a choice between the indirect and direct methods in similar situations, accountants choose the indirect method almost exclusively. The American Institute of Certified Public Accountants reports that approximately 98% of all companies choose the indirect method of cash flows.

The reason is 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 the chart of accounts to be restructured in order to collect different types of information. The indirect method, as you will see, can be more easily derived from existing accounting reports.

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See the FASB summary of the statement of cash flows for another summary of everything you have learned in this module.