Solutions/Accounting & Finance
Accounting & FinanceLevel: Intermediate

Statement of Cash Flows (Indirect Method): Step-by-Step Preparation

Reviewed by David Thorne, FCA.
Free Educational Resource
Problem Statement / Assignment Scope

Prepare the Cash Flows from Operating Activities section for a company with Net Income Ā£120,000, Depreciation Ā£18,000, Accounts Receivable increase Ā£12,000, Inventory decrease Ā£7,000, and Accounts Payable increase Ā£5,000.

Prerequisites: Accrual accounting vs cash accounting, working capital mechanics.

Step-by-Step Worked Solution

1. Indirect Method Calculation Table

Operating Cash Flow Item Amount (Ā£)
Net Income120,000
Add: Depreciation (Non-cash expense)+18,000
Less: Increase in Accounts Receivable-12,000
Add: Decrease in Inventory+7,000
Add: Increase in Accounts Payable+5,000
Net Cash Provided by Operating ActivitiesĀ£138,000

Key Takeaways & Core Principles

  • Asset increases consume cash (deduct); asset decreases release cash (add).
  • Liability increases provide cash (add); liability decreases consume cash (deduct).
  • Depreciation is added back because it is a non-cash expense.

Frequently Asked Questions

Why do most companies use the indirect method over the direct method?

The indirect method is easier to prepare because it reconciles directly from the existing income statement and balance sheet without requiring real-time transaction re-categorization.

Academic References & Standards

  • [1]International Accounting Standards Board (IASB). (2023). IAS 7: Statement of Cash Flows. Source Link
Custom Academic Guidance

Need a Custom Solution for Your Specific Assignment?

Our verified Ph.D. subject experts deliver 100% original, rubric-compliant assistance with Turnitin reports and step-by-step explanations.

Order Custom Assignment Help ā†’Explore Accounting & Finance Services
Explore Academic Resources

Related Academic Services & Guides

Expert Services

Educational Solutions

Free Student Tools