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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