ACCT5930 Chap.10 Cash Flow Statement: Preparation
Cash Flow Statement: Preparation
Cash flow statement preparation combines classification with reconciliation. The direct method reports major operating receipts and payments. The indirect method begins with accrual profit, adds back non-cash expenses, removes gains or losses whose cash consequences belong in investing, and adjusts for operating working-capital movements. Both methods produce the same net operating cash flow when applied consistently.
Investing and financing sections are then added to determine the net change in cash. Significant non-cash investing and financing transactions are excluded from cash totals but disclosed separately. A complete statement reconciles opening cash to the closing balance reported on the balance sheet.
What this chapter covers
- 01
The direct method presents major operating cash receipts and payments
- 02
The indirect method reconciles accrual profit to operating cash flow
- 03
Non-cash expenses are reversed in the indirect reconciliation
- 04
Operating asset increases generally absorb cash relative to profit
- 05
Operating liability increases generally preserve cash relative to profit
- 06
Disposal gains or losses are removed before investing proceeds are reported
- 07
Non-cash investing and financing events are disclosed outside cash totals
- 08
The completed statement must reconcile to balance-sheet cash
Worked example · free
Prepare all three cash flow sections and closing cash
- +1Operating cash is $76,000 + $16,000 minus $8,000 + $5,000 + $3,000 = $92,000 inflow.
- +1Investing cash is a $39,000 outflow for equipment.
- +1Financing cash is $28,000 loan inflow minus $11,000 dividends = $17,000 inflow.
- +1Net cash change is $92,000 minus $39,000 + $17,000 = $70,000 increase.
- +1Closing cash is $42,000 + $70,000 = $112,000.
Key terms
- Direct Method
- An operating cash presentation that reports major categories of cash receipts and cash payments.
- Indirect Method
- An operating cash presentation that reconciles accrual profit to net operating cash flow.
- Non-Cash Expense
- An expense such as depreciation that reduces profit without causing a current-period cash outflow.
- Working Capital Adjustment
- An indirect-method adjustment for changes in operating current assets and current liabilities.
- Non-Cash Transaction
- An investing or financing event that changes assets, liabilities or equity without current cash movement.
- Closing Cash
- The period-end cash balance obtained after adding the net change in cash to opening cash.
Cash Flow Statement: Preparation FAQ
Why is depreciation added back under the indirect method?
Depreciation reduced accrual profit without using current-period cash. Adding it back removes that non-cash reduction from the operating cash reconciliation. The original asset purchase remains an investing cash event when paid.
How do working-capital changes affect operating cash?
An operating asset increase generally absorbs cash relative to profit, while an operating asset decrease releases cash. An operating liability increase generally preserves cash, while a decrease uses cash to settle amounts previously unpaid.
Where do disposal proceeds and gains appear?
Cash proceeds appear in investing activities. Under the indirect method, remove the gain or loss included in profit before reporting the proceeds in investing, preventing the disposal effect from being counted twice.
How are non-cash asset acquisitions treated?
Exclude them from the three cash-flow totals because no cash moved. When significant, disclose the investing and financing nature separately so users can see the resource acquired and obligation or equity issued.
Exam move
Prepare the statement in layers. First reconcile profit to operating cash and mark every adjustment as non-cash, operating asset or operating liability. Second list investing events. Third list financing events. Fourth total the sections and reconcile opening to closing cash.
Practise translating the same operating data through direct receipts and payments and the indirect profit bridge so you understand why both reach the same result. Use statement labels and signs consistently, and keep significant non-cash transactions on a disclosure list rather than forcing them into cash totals.
For the indirect method, annotate every operating adjustment with the reason for reversing or translating the accrual effect. Add back non-cash expenses because they reduced profit without reducing cash; remove disposal gains because the related cash belongs in investing; subtract increases in operating assets and add increases in operating liabilities. Reverse those signs for decreases.
On a parallel worksheet, derive direct customer receipts and supplier or employee payments from revenue, expenses and balance changes. Compare the resulting operating cash total with the indirect method before adding investing and financing sections. Finally, prove the statement twice: the section totals must produce the net change in cash, and opening cash plus that change must equal the balance-sheet closing cash.
Maintain a separate non-cash schedule for asset acquisitions financed directly by debt or equity. Remove one working-capital adjustment and use the closing-cash mismatch to diagnose precisely which bridge is incomplete.
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