Statement of Cash Flows
(Indirect Method)
• The statement of cash flows prepared using the
indirect method adjusts net income for the
changes in balance sheet accounts to calculate
the cash from operating activities.
• In
other words, changes in asset and liability
accounts that affect cash balances throughout
the year are added to or subtracted from net
income at the end of the period to arrive at the
operating cash flow.
ACCRUAL ACCOUNTING PRINCIPLE
• revenue
should be recognized when earned
regardless of collection and expenses should be
recognized when incurred regardless of payment.
Example:
• When a barber finishes performing his services he
should record it as revenue. When the barber shop
receives an electricity bill, it should record it as an
expense even if it is unpaid.
Use the following information to calculate net cash flow from
operating activities using indirect method:
Net Income
Depreciation Expense
Increase in Accounts Receivable
Increase in Prepaid Rent
Decrease in Prepaid Insurance
Increase in Accounts Payable
Increase in Wages Payable
Decrease in Income Tax Payable
Gain on Sale of Equipment
P 7,000
1,000
4,400
7,000
1,300
14,000
1,000
700
1,800
Cash Flows from Operating Activities
Net Income
Add back:
Depreciation Expense
Less:
Gain on Sale of Equipment
P 7,000
1,000
Increase in Accounts Receivable
Increase in Prepaid Rent
Decrease in Prepaid Insurance
Increase in Accounts Payable
Increase in Wages Payable
Decrease in Income Tax Payable
(1,800)
P 6,200
(4,400)
(7,000)
1,300
14,000
1,000
(700)
Net Cash generated by Operating Activities
P10,400