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    Direct and Indirect Method

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    Ian Golez
    This document shows the adjustments needed to convert an income statement into an operating cash flow statement using the direct method. It lists revenue and expense accounts and shows how to adjust for changes in working capital accounts like receivables and payables to derive cash inflows and outflows from operating activities. The adjustments include changes in inventory, accounts receivable/payable, accrued expenses, prepaid expenses, and interest/income taxes payable.

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    Direct and Indirect Method

    Uploaded by

    Ian Golez
    23 views2 pages
    This document shows the adjustments needed to convert an income statement into an operating cash flow statement using the direct method. It lists revenue and expense accounts and shows how to adjust for changes in working capital accounts like receivables and payables to derive cash inflows and outflows from operating activities. The adjustments include changes in inventory, accounts receivable/payable, accrued expenses, prepaid expenses, and interest/income taxes payable.

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    Direct-and-Indirect-Method

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    This document shows the adjustments needed to convert an income statement into an operating cash flow statement using the direct method. It lists revenue and expense accounts and shows how to adjust for changes in working capital accounts like receivables and payables to derive cash inflows and outflows from operating activities. The adjustments include changes in inventory, accounts receivable/payable, accrued expenses, prepaid expenses, and interest/income taxes payable.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    23 views2 pages

    Direct and Indirect Method

    Uploaded by

    Ian Golez
    This document shows the adjustments needed to convert an income statement into an operating cash flow statement using the direct method. It lists revenue and expense accounts and shows how to adjust for changes in working capital accounts like receivables and payables to derive cash inflows and outflows from operating activities. The adjustments include changes in inventory, accounts receivable/payable, accrued expenses, prepaid expenses, and interest/income taxes payable.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Income Net Operating

    Statement cash Flows from


    Adjustments Cash Flows
    Accounts Operating Activities

    Sales
    { + Decrease_in accounts receivable or
    - ·Increase m accounts receivable Collections from
    revenue + Increase in deferred revenue or
    - Decrease in deferred revenue
    }= customers

    Interest + Decrease in interest receivable or


    - Increase in interest receivable Interest and cash Inflows
    revenue
    + Amortization of premium on investment in dividends From Operating
    and
    bonds or = collected Activities
    dividend
    revenue - Amortization of discount on investment in
    bonds

    { + Increase in unearned revenues or }


    Other - Decrease in unearned revenues Other operating
    revenues - Gains on disposals of assets and liabilities = receipts
    - Investment income (equity method)

    Cost of { + Increase in inventmy or


    - Decrease in inventory Payments to
    goods
    sold
    + Decrease in accounts payable or ·
    - Increase in accounts payable
    }= suppliers

    - Depreciation, depletion and amortization


    Selling and expense Payments of
    administrativ + Decrease in accrued expenses or
    e - Increase in accrued expenses = operating
    expenses
    expenses + Increase in prepaid expenses or
    - Decrease in prepaid expenses
    Cash Outflows
    + Decrease in interest payable or For Operating
    - Increase in interest payable Activities
    Interest Payments of
    + Amortization of premium on bonds payable =
    interest
    expense or
    - . Amortization of discount on bonds payable

    Other { - Losses on disposals of assets and liabilities } _ Other operating


    expenses - Investment loss ( equity method) - payments

    + Decrease in income taxes payable or


    - Increase in Income taxes payable
    Income tax Payments of
    + Decrease in deferred income taxes payable =
    income taxes
    expense or
    - Increase in deferred income taxes payable

    Figure 13-3. Adjustment~ to Convert Income Statement Amounts to


    Operating Cash Flows (DiRECT METHOD)
    [ Net Income after Taxes ]
    Plus

    Decreases in current assets (except cash, marketable securities and non-


    trade accounts)
    Increases in current liabilities (except financing or non-operating accounts,
    e.g., bank loan, current maturities of long-term debt) ·
    Depreciation, depletion, and amortization expense
    Amortization of discount on bonds payable
    Amortization of premium on investment in bonds
    Increase in deferred income taxes
    loss (net) on disposal of assets or liabilities
    Subsidiary loss under the equity method
    Interest expense *
    Income taxes*

    Minus

    Increases in current assets ( except cash, marketable securitiesr and non-


    trade accounts)
    Decreases in current liabilities (except financing or non-operating accounts,
    e.g., bank loan, current maturities of long-term debt)
    Amortization of premium on bonds payable
    Amortization of discount on investment in bonds
    Decrease in deferred income taxes
    Gain (net) on disposal of assets or liabilities
    Subsidiary gain under the equity method

    Equals

    [ Net cash Flow From Operations ]


    Interest paid
    Income taxes paid

    ( Net cash from Operating Activities )

    * Shown separately
    Figure 13-4. ~djustments to Convert Net Income to Net Cash Flow from
    Operating Activities (INDIRECT METHOD)

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