In order to
prepare the cash flow statement by indirect method lets assume to take data
from the first year of operations of a company say ABC. Suppose Company ABC
started at January 2007, with issuing its 60,000 shares in the market where the
value of each share was $1 and the value of total common stock of the Company
ABC was $60,000. All the other essentials such as office, furniture and
equipment of the company was rented for the first year and the Company ABC
provided tax based consultation services to its customers. The balance sheet of
the company at the beginning and the end of the year is as under:-
Balance Sheet of ABC Company
|
Assets
Cash
Account Receivables
Total
|
Dec 31, 2007
$49,000
$36,000
$85,000
|
Jan 1, 2007
$ 0
$ 0
$ 0
|
Change
$49,000 Increase
$36,000 Increase
|
|
Liabilities and
Equity
Accounts Payable
Common Stock
Retained Earnings
Total
|
$5000
$60,000
$20,000
$85,000
|
$ 0
$ 0
$ 0
$0
|
$ 5000 Increase
$ 60,000 Increase
$20,000 Increase
|
Income Statement of ABC Company
|
Revenue
|
$125,000
|
|
Operating Expense
|
$85,000
|
|
Income before taxes
|
$40,000
|
|
Income after taxes
|
$6,000
|
|
Net Income
|
$34,000
|
Conversion of the Net
Income to the Net Cash Flow
|
Net Income
Net Income is adjusted to reconcile it into net cash by operating
activities
Increase in account
receivables
Increase in account
payable
Net Cash provided by
operating activates
|
$36,000
$5000
|
$34,000
$31,000
$3000
|
The above
mentioned table shows that with the adjustments of accounts payable and
accounts receivables the net income is transformed into the net cash.
Now the cash
flow statement preparation by indirect method is as follows:-
Cash Flow
Statement by Indirect Method
|
Cash Flows from
operating activities
Net Income
Increase in account receivables
Increase in account payable
Net Cash by
operating activities
|
$36,000
$5000
|
$34,000
$31,000
$3000
|
|
Cash Flow from
Financing activities
Issuance of Common Stock
Payment of cash dividend
Net cash provided by Financing activities
Net Increase in Cash
January 1, 2007
December 31, 2007
|
$60,000
$14,000
|
$46,000
$49,000
$0
$49,000
|
