Cash Flow by Indirect Method
The Statement of Cash Flow is a useful tool in business management. In many countries, it is a mandatory piece that is part of the accounting reports of a company in the same way that the balance sheet and income statement.
The cash flow statement is classified according to their origin into three groups, as follows:
a) Operating Activities;
b) Investing Activities;
c) Financing Activities.
The Cash flow statement by Indirect Method starts with net income obtained from the income statements, and sum of the differences in assets, liabilities and net worth.
Considering the differences between the balance accounts by two consecutives dates, we can see that:
1) Increase in asset accounts represents cash uses;
2) decreases in asset accounts represents cash source;
3) Increase in liabilities represents a source of cash;
4) decrease in liabilities represents uses of cash.
Let us illustrate with the following example, pretty intuitive: When an entity takes a bank loan, the funds are carried immediately to the account cash, increasing immediately the available values. Upon payment of the loan, the resources are reduced.
In the income statement, the expenses that do not affect the cash account as depreciation and the intangible amortization are deducted from the sales or revenues. For this reason, these expenses are added to cash operating activities, to show a real cash generation in the cash flow by indirect method.
To prepare the cash flow report, a worksheet is always useful to classify the balance sheet accounts, to make them comparable, as well as, the adjustments for possible subsequent events of the previous period.
How to calculate the Cash Flow by Indirect Method
DuPont Analysis Investments - Net Present Value Discounted Cash Flow (DCF) Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Average Interest Rate Average Rate of Return Break-Even Point in Quantities Break-Even Point (BEP) in Sales French Amortization System Constant Amortization System German Amortization System Sinking Fund American Amortization System Amortization - Average Constant and French Straight Line Depreciation Method Sum of Digits Depreciation Method (SYD) Balance Sheet Analysis Cash Flow Statement by Direct Method Cash Flow Statement by Indirect Method