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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:

    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   $3,000,000
    Adjustments for:    
    Depreciation and amortization $125,000  
    Provision for losses on accounts receivable 20,000  
    Gain on sale of facility (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 (500,000)  
    Proceeds from sale of equipment 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   $5,000,000

     
    Related Topics

    Statement of cash flows overview
    Direct method
    How to prepare a cash flow statement
    What is a funds flow statement?
    What is the difference between cash flow and funds flow?