Indirect Format Cash Flow Statements
This statement begins with net income and adjusts for changes in account balances that affect available cash. It is slightly more difficult to understand initially but has far more potential for analysis.
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It also serves to answer the important question, what is the difference between net profit and net cash flow? A statement prepared using this method has four distinct sections:
• Operations
• Investing
• Financing
• Supplemental information
Operations
When you look at the example below of Gary's Garden Furniture you will see that the first entry is net income. This figure has been taken from the Income Statement for the period. The idea is that net income is presumed to be equal to net cash flow except for the adjustments that make up the details of this statement.
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Operations is the process of running the organization with all of the related cash flows such as buying and selling goods, services, manufacturing, and paying employees. The entries under this title effectively convert the items reported on the income statement from the accrual basis of accounting to cash.
Investing
This reports the purchase and sale of long-term investments and property, plant, and equipment.
Financing
This reports the issuance and repurchase of the organization's own bonds and stock and the payment of dividends.
Supplemental information
This reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.
The report below is an indirect format cash flow statement for Gary's Garden Furniture.
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To appreciate the information this indirect format statement provides you with, you need to work through the line descriptions, one line at a time. The explanations on the following pages will help you to understand exactly what the above cash flow statement tells you.
You may also be interested in:
Cash Flow Analysis Definition | Managing Working Capital | Cash Flow | Changes in the Cash Account | Direct Format Cash Flow Statement | Cash Flow from Operations | Cash Flow from Investments | Cash Flow from Financing.
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