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Cash Flow indirect method
Indirect Method: The indirect method of calculating cash flow uses net-income as a starting point, and makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions.
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Format of Statement of Cash Flows (Indirect method) |
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Cash Flow from Operating Activities |
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Net Income |
XXX,XXX |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
XX,XXX |
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Changes in other accounts affecting operations: |
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(Increase)/decrease in accounts receivable |
X,XXX |
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(Increase)/decrease in inventories |
X,XXX |
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(Increase)/decrease in prepaid expenses |
X,XXX |
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Increase/(decrease) in accounts payable |
X,XXX |
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Increase/(decrease) in taxes payable |
X,XXX |
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Net cash provided by operating activities |
XXX,XXX |
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Cash Flow from Investing Activities |
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Capital expenditures |
(XXX,XXX) |
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Proceeds from sales of equipment |
XX,XXX |
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Proceeds from sales of investments |
XX,XXX |
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Investments in subsidiary |
(XXX,XXX) |
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Net cash provided by investing activities |
(XXX,XXX) |
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Cash Flow from Financing Activities |
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Payments of long-term debt |
(XX,XXX) |
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Proceeds from issuance of long-term debt |
XX,XXX |
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Proceeds from issuance of common stock |
XXX,XXX |
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Dividends paid |
(XX,XXX) |
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Purchase of treasury stock |
(XX,XXX) |
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Net cash provided by financing activities |
(XX,XXX) |
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Increase (Decrease) in Cash |
XX,XXX |
A company’s cash position is affected as a result of operating, investing and financial activities. The following section describes the key components of the cash flow statement. Cash Flow from Operating Activities: This represents the cash inflow and outflow from the core business activities of a company. For example, cash received from the sale of goods or services, payments made to suppliers for materials, payments made to employees, taxes paid and all other activities that are directly related to the core operations of the business. This figure is very important for creditors and investors as it represents the cash generating ability of the company’s primary operations. A consistent negative figure is an indicator of serious future liquidity issues. Cash Flow from Investing Activities: The cash flow generated from investing activities represents capital expenditures, cash released on the sale of assets and cash gained or lost by investing surplus cash in different companies or ventures. While it is important that the cash flow from investing activities shows a positive trend, a negative figure does not necessarily indicate liquidity or solvency problems. For example, significant increase in capital expenditures during a given year may result in a negative cash flow from investing activities, but indicates the company has made investments for its future expansion. Cash Flow from Financing Activities: The cash flow from financing activities represents the flow of money between a company its owners and creditors. It includes cash inflow from issuing securities, loans and deposits and cash outflow to the payment of debts and the redemption of capital.