The
preparation of the cash flow statement with indirect method begins with
accessing the net income. The figures of the net income are acquired from the
income statement that is the loss and profit account of a company. A number of
changes and adjustments are made on the headings of the cash flow statements
after acquiring the actual figures. In the Expense head of the cash flow
statement cash outflows such depreciation and delayed taxes are not included. Moreover
the cash outflows are not considered as expenses such as increase in the level
of inventory is also subtracted. Certain revenues are not considered as cash
inflows and these revenues include account receivable and profit incurred by
the sale of a property or any other asset. All these adjustments in the net
income transformed it into net cash flow from the operating activities of a
firm. The amount that is calculated is then added with the cash inflows that
are received from the financing activities and investing activities of a firm.
The next step is to deduct cash outflows from the resultant figure. The figure
that is produced at the end is the cash balance of the firm for the period of
the time in which the statement is prepared.
Generally
three sources are used to acquire information to prepare cash flow statement by
indirect method. The first source is the comparative balance sheets of a firm
that provide us with the changes in the assets, liabilities and equities of a
firm from the beginning to the end of a certain period. The second source is
the data acquired from the current income statement of a firm as it gives us
information regarding the amount of cash provided and used in different
operations of a firm. The third and the final source is the transactional data
that is acquired from the general ledger that shows how the cash was provided
and how it is actually used by the firm in that specific period.
There are
three steps involved in preparing a cash flow statement by indirect method.
First step is to determine the change and transformation in the cash. This can
be done by reviewing the difference between the beginning and the ending cash
balance. The second step is to determine net cash from operating activities and
the last step is to determine the net cash flow from financing and investing
activities of a firm.
