Financial Statements - Cash Flow Computations - Indirect Method

Under
U.S. and ISA GAAP, the statement of cash flow can be presented by means of two ways:

  1. The indirect method
  2. The direct method

The Indirect Method
The indirect method is preferred by most firms because is shows a reconciliation from reported net income to cash provided by operations.

Calculating Cash flow from Operations
Here are the steps for calculating the cash flow from operations using the indirect method:

  1. Start with net income.
  2. Add back non-cash expenses.
    • (Such as depreciation and amortization)
  3. Adjust for gains and losses on sales on assets.
    • Add back losses
    • Subtract out gains
  4. Account for changes in all non-cash current assets.
  5. Account for changes in all current assets and liabilities except notes payable and dividends payable.

In general, candidates should utilize the following rules:

  • (Such as depreciation and amortization)

The following example illustrates a typical net cash flow from operating activities:

Cash Flow from Investment Activities
Cash Flow from investing activities includes purchasing and selling long-term assets and marketable securities (other than cash equivalents), as well as making and collecting on loans.

Here's the calculation of the cash flows from investing using the indirect method:

  • Add back losses
  • Subtract out gains
Cash from sale of Land

5,000

Purchase of Plant & Equipment (50,000)
Net cash flow from investing activities (45,000)

Cash Flow from Financing Activities
Cash Flow from financing activities includes issuing and buying back capital stock, as well as borrowing and repaying loans on a short- or long-term basis (issuing bonds and notes). Dividends paid are also included in this category, but the repayment of accounts payable or accrued liabilities is not.

Here's the calculation of the cash flows from financing using the indirect method:

Cash Flow Computations - Direct Method


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RELATED TERMS
  1. Indirect Method

    A method for creating a statement of cash flows a company may ...
  2. Direct Method

    A method of creating a statement of cash flows during a given ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  4. Cash Flow From Investing Activities

    An item on the cash flow statement that reports the aggregate ...
  5. Non-Operating Cash Flows

    Cash flows (inflows and outflows) that are not related to the ...
  6. Operating Cash Flow Ratio

    A measure of how well current liabilities are covered by the ...
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