Statement of cash flow
Indirect method
This technique is widely used by companies because it demonstrates an understanding from recorded net income to the cash flow from operating activities. As such, indirect method involves calculating cash flow using operating activities (Pinson, 2004). In this case;
- Start with net income
- Add any non cash expenses this includes depreciation expenses, amortization among others
- Any increases or decreases on sales of assets are adjusted; all increases are subtracted and decreases are added
- Record all adjustments in non cash current assets
- Record for all adjustments in current assets and liabilities excluding notes payable as well as dividends payable
Basically, some of the key rules of indirect method are;
- All increase in assets are subtracted
- All decreases in assets are added
- All increases in liability or capital are added
- All decreases in liability or capital are subtracted
Nybrostrand Company
Statement of cash flow
Indirect method
Cash flow from operating activities:
Net income 118,650
Add Depreciation expenses 24,350
Increases on inventory 42,500
Increases on land 400,000
Decreases on long-term debt 360,000
Decrease in dividends 15,000
Net cash provided by operating activities 75,500
Cash flow from Investment Activities
Cash flow from investment activities entails sales as well as purchases of fixed assets and marketable securities. Below is a computation of cash flow from investment activities using the indirect method
Nybrostrand Company
Statement of cash flow
Indirect method
Cash 30,000
Cash from sale of stocks 150,000
Cash flow from investment activities 120,000
Cash flows and net income
Owing to the fact that many company owners are not accountants and do not fully understand net income or cash flows, these statements demonstrate how the business is operating. Whereas cash does not present the clear picture of what is happening in a company, income statements do. In some case, net income is confused for cash flows. Whereas, cash flow and net income are related, they are similar (Taylor, 2003). Net income is profit obtained from daily operations of the company. This item comprises of revenue or sales and expenses. Nevertheless, other expenses used to compute net income are referred to as non-cash items including amortization and depreciation. But, they do not affect cash flow. Using indirect method, the only distinction between cash flow and net income will be non-cash items. There is no universal principle that shows that net income is always greater than cash flow or the other way round. It is always good for companies to prepare statement of cash flows and income statement monthly o keep records of businesses and how they affect cash in the bank. Orr, Jayson. (2000).
Income statement
Nybrostrand Company
Income statement
For year ending December 31, 2012
Revenues
|
$ 586,000
|
Expenses
Salaries Utilities Depreciation expenses Insurance Marketing Rent Property taxes
Total expense
|
78,500 6,700 24,350 1,400 4,500 28,000 16,900 307,000 $467,350
|
Net income | $118,650 |
Balance sheet
Nybrostrand Company
Balance sheet
December 31, 2012
Assets ($) | Liabilities ($) |
Current assets
Cash 30,000 Account receivable 36,500 Inventory 76,500 Depreciation expenses 24,350 Total current assets 167,350 Fixed assets Equipment (net of depreciation) 415,000 Land 400,000 Total fixed assets 815,000 Total assets 982,350 |
Current liability
Accounts payable 78,000 Dividends payable 15,000 Insurance 1,400 Marketing 4,500 Property taxes 16,900 Rent 28000 Salaries 78,500 Utilities 6,700 Total current liability 279,000 Long term liabilities Long term debts 127,000 Total long term liabilities 127,000 Shareholders’ equity Common stock 160,000 Paid-in capital 50,000 Retained earnings 103,650 Total shareholders’ equity 263,650 Total liability and equity 669,650 |
References
Orr, Jayson. (2000). “Making Your Numbers Talk: The Income Statement.” CMA Management.
Pinson, Linda. (2004). Keeping the Books: Basic Record Keeping and Accounting for Successful Small Business. Business & Economics.
Taylor, Peter. (2003). Book-Keeping & Accounting for Small Business. Business & Economics.