LEDGERFUSION CASH FLOW EXPERTISE.
Cash flow statements prepared under the indirect method, also known as the reconciliation method, are one of the two primary ways to present a company’s cash flows in its financial statements. The indirect method starts with the net income from the income statement and adjusts for non-cash items and changes in working capital to arrive at the net cash flow from operating activities. Here’s how you typically create a cash flow statement under the indirect method:
1. Operating Activities :
A] Net Income :
Start with the net income figure from the income statement. This represents the profit the company earned during the period.
B] Add Back Depreciation and Amortization :
These are non-cash expenses. Since they don’t involve actual cash outflows, they are added back to the net income.
C] Subtract Non-operating Expenses :
Remove any non-operating expenses, such as interest and income tax expenses, because they are not part of the operating cash flows.
D] Adjust for Changes in Working Capital :
Make adjustments for changes in working capital accounts, such as accounts receivable, accounts payable, and inventory. An increase in accounts receivable or inventory represents cash outflows (subtracted), while an increase in accounts payable represents a cash inflow (added).
