INDIRECT METHOD (Common)

 

1.

  1. Begin with the balance sheet data by taking the cash balance from the most recent balance sheet and subtracting the cash balance  from the prior year. The cash flow statement must balance to this control number.
  2. Next, determine the change in each balance sheet account.
  3. It is necessary to determine if the balance change is an inflow or an outflow of cash or a source or use of cash. An increase in an asset balance results in a cash outflow. While a decrease in a liability or equity account, has the opposite effect.
  4. Determine if each change in account balance  is an I) operating, II) investing or III) financing activity.
  5. Cash Effects of Balance Sheet Account Changes
    1. Cash Inflow
      1. Decrease in an Asset Account ( - )
      2. Increase in a Payable Account
      3. Increase in an Equity Account
    2. Cash Outflow
      1. Increase in an Asset Account
      2. Decrease in a Payable Account ( - )
      3. Decrease in an Equity Account ( - )
    Using the Indirect Method, cash flows from Operating Activities are reported by adjusting net income for revenues, expenses, gains, and losses that appear on the income statement but do not have an effect on cash.