Question

Below is an example of a statement of cash flows. Explain the indirect method and how the cash is moving within this company. What are the differences between the indirect and direct method?

Statement of Cash Flows Indirect Method For the Year Ending 12/31/2015 Cash Flows from Operating Activities: Net income Add (deduct items) not affecting cash: Depreciation expense Gain on sale of equipment 43,987 2,150 (150) (3,500) 2,800 45,287 Increase in accounts payable Net cash provided by operating activities Cash Flows from Investing Activities: Proceeds from sale of equipment Purchase of land Net cash used for investing activities 25,000 (60,000) (35,000) Cash Flows from Financing Activities: New long-term borrowing Payment of long-term debt Purchase of treasury stock Payment of dividends Net cash used for financing activities 350 (200) (175) (50) (75) Increase (decrease) in cash Cash balance, January 1, 2015 Cash balance, December 31, 2015 10,212 35,620 45,832

Answer 1

Answer is given below

Cash flow statement indirect method

Net Income is adjusted for non cash expense. In this case it is depreciation. Gain on sale of equipment is adjusted since it is investing activity. Indirect method of cash flow statement adjusts changes in working capital to determine cash flow from operating activities. Increase in Current Assets will reduce cash inflow and Increase in Current Liabilities will increase cash inflow. Decrease in Current Assets will increase cash inflow and decrease in current liabilities will decrease in cash inflow

In the given case there is Net cash provided by Operating activities and Net cash has been used by investing activities and financing activities. Overall there is increase in Cash which is added to opening balance of cash and cash equivalents to get closing cash balance.

Similarities between direct and indirect method of cash flow statement

• Cash flow from investing activities are shown in similar way
• Cash flow from financing activities are also shown in similar way

Differences between direct method and indirect method of cash flow statement

The differences are in the way the operating cash flow is shown

• Direct method of cash flow statement shows the cash flow through actual movement of cash that is cash received from customers , cash paid to suppliers, Cash paid for operating expenses, Cash paid for interest payments and cash paid for income tax payments
• Indirect method of cash flow statements adjusts the non cash items like depreciation, and amortization expense, losses and gain on sale of fixed assets, investment and then adds or deducts the changes in working capital to arrive at cash flow from operating activities. For example Increase in Account Receivable will decrease the cash inflow, Increase in Account payable will increase the cash inflow