Cash flow statement indirect method

The indirect method for the preparation of the statement of cash flows involves the adjustment of net income with changes in balance sheet accounts to arrive at the amount of cash generated by operating activities. 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.

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. The alternative reporting method is the direct method.

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)  
Increase in trade receivables (250,000)  
Decrease in inventories 325,000  
Decrease in trade payables (50,000)  
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