Statement of cash flow

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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;

  1. All increase in assets are subtracted
  2. All decreases in assets are added
  3. All increases in liability or capital are added
  4. 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.

 

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