13.3: Preparing a Statement of Cash Flow
Learning Objectives
- Prepare a statement of cash flow using the indirect method
Ok, so let’s put together all of the great stuff we have learned about cash flow! A reminder the indirect method is working from the bottom of the income statement and adjusting it to the cash basis. So we would take the net income, and work from there.
So here is our income statement on the accrual basis:
| Income Statement | |
|---|---|
| Month ended 1/31/XX | |
| Accrual Basis | |
| Income | |
| Sales | 25000 |
| Expenses | |
| Rent | 1000 |
| Utilities | 1000 |
| Supplies | 1250 |
| Payroll | 5000 |
| Depreciation | 4000 |
| Other Expenses | 2500 |
| 10250 |
Our net income is $10,250, so we will start there and work up to our cash flow statement
The first step is to add back our depreciation, because that is a non-cash expense!
| Net Income | 10250 |
|---|---|
| Add: Depreciation (non-cash expense) | 4000 |
| Total | 14250 |
This balance will move to the cash flow statement!
The second step is to analyze the net changes in the balance sheet accounts that we discussed earlier. Accounts receivable, accounts payable and the other current assets and liabilities will also affect the cash flow of the company.
So let’s assume the following changes:
| 1/1/XX | 1/31/XX | ||
|---|---|---|---|
| Accounts Receivable | 5000 | 4000 | decrease |
| Inventory | 3000 | 5000 | increase |
| Accounts payable | 2500 | 3850 | increase |
| Income taxes payable | 1000 | 500 | decrease |
This information will come in handy in the next step!
So how do these items affect cash? Going back to our chart from our discussion about indirect cash flow analysis we know that:
| If the account balance increases | If the account balance decreases | |
| Current Assets | ||
| Accounts Receivable (money from customers) | Subtract | Add |
| Inventory (buy or pay for inventory) | Subtract | Add |
| Prepaid expenses (insurance) | Subtract | Add |
| Current Liabilities | ||
| Accounts Payable (pay your bills) | Add | Subtract |
| Accrued Liabilities (payroll) | Add | Subtract |
| Income taxes payable (tax payments) | Add | Subtract |
So, here is the final deal!
Cash Flow Statement: Operating Activities-Indirect Method
| 1/1/XX | 1/31/XX | ||
| Accounts receivable | $5,000 | $4,000 | decrease |
| Inventory | $3,000 | $5,000 | increase |
| Accounts payable | $2,500 | $3,850 | increase |
| Income taxes payable | $1,000 | $500 | decrease |
| Beginning cash | $14,250 | ||
| Decrease in accounts receivable | $1,000 | increase cash | |
| Increase in inventory | ($2,000) | decrease cash | |
| Increase in accounts payable | $1,350 | increase cash | |
| Decrease in income tax payable | ($500) | decrease cash | |
| Net change in cash | ($150) | ||
| Ending cash | $14,100 |
So the income statement and balance sheet only show part of the picture. A company can have awesome sales, but if they struggle to collect on their accounts receivable, they may have issues with their cash flow! It is important as a manager to look at the big picture, in order to find ways to increase profits and create a positive cash flow!
Practice Questions