INDIRECT METHOD OF CASH FLOW STATEMENT
INTERMEDIATE ACCOUNTING II
Direct Method of Preparing
Cash Flows from Operating Activities
Analyze the Income Statement
Revenue (Sales) = Cash Received
Expenses = Cash Paid
Determine the amount of cash received from customers
Sales + Decrease in A/R (- Increase in A/R)
Other Revenue + Decrease in Receivable (- Increase in Receivable)
Determine the amount of cash paid to suppliers
Cost of Goods Sold + Increase in Inventory (- Decrease in Inventory)
+ Decrease in A/P (- Increase in A/P)
Other Expenses + Decrease in Payable (- Increase in Payable)
+ Premium Amortization (-Discount Amortization)
Summary journal entries can also be used to analyze cash received/paid.
Example of summary journal entry:
ABC Company had sales of $1,000. Accounts receivable increased during the period by $200.
Using the analysis method, cash received from customers would be $800
($1,000 Sales - $200 increase in A/R).
Using a summary journal entry, you will determine the same amount:
Account DR CR
Accounts Receivable 200 (to record an increase in A/R)
Cash 800 (to balance = cash received from cust)
Sales 1,000 (to record sales)
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