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13.3: Preparing a Statement of Cash Flow

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  • 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
    Sales 25000
    Rent 1000
    Utilities 1000
    Supplies 1250
    Payroll 5000
    Depreciation 4000
    Other Expenses 2500

    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!

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    • Preparing a Statement of Cash Flow. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution