I need help completing a statement of cash flow using the indirect method.
Completing a statement of cash flows using the indirect method involves adjusting the net income amount to reflect the actual cash flows generated or used by the business during the reporting period. Here's a step-by-step guide on how to do it:
Step 1: Start with the Net Income
Begin by taking the net income figure from the income statement for the given reporting period. The net income represents the profit or loss generated by the business during the period.
Step 2: Adjust for Non-Cash Expenses
Non-cash expenses, such as depreciation and amortization, do not involve an outflow of cash. To adjust for these expenses, add them back to the net income amount. For example, if depreciation expense is $10,000, you would add $10,000 to the net income.
Step 3: Adjust for Changes in Working Capital Accounts
Next, you need to account for changes in working capital accounts, including accounts receivable, accounts payable, and inventory. If an asset account decreases, it means that cash was received, while an increase indicates that cash was used. If a liability account decreases, it means that cash was used to pay off the liability, while an increase indicates that cash was received. Adjust the net income accordingly.
Step 4: Include Investing and Financing Activities
Include the cash flows from investing and financing activities in the statement. Investing activities involve the purchase or sale of long-term assets, such as property, plant, and equipment. Financing activities include transactions with lenders or investors, such as issuing stock, borrowing money, or making loan repayments.
Step 5: Calculate the Net Increase or Decrease in Cash
Sum up all the cash flow adjustments from steps 2 to 4 and calculate the net increase or decrease in cash for the reporting period.
Step 6: Add the Net Increase or Decrease in Cash to the Beginning Cash Balance
Finally, add the net increase or decrease in cash to the beginning cash balance to arrive at the ending cash balance for the period.
By following these steps, you should be able to complete a statement of cash flows using the indirect method. Keep in mind that this is a general guide, and the specific requirements or format may vary depending on the reporting standards or regulations applicable to your situation.