Accounting: The Language of Business - Vol. 2 (Intermediate: Part 81)

All that Lenin learned about business from the tales of his comrades who occasionally sat in business offices was that it required a lot of scribbling, recording, and ciphering. Thus, he declares that accounting and control are the chief things necessary for the organizing and correct functioning of society. . . . Here we have the philosophy of the filing clerk in its full glory.

Ludwig von Mises

 Statements of Financial Position and Cash Flows and the Annual Report (Part S)

by

Charles Lamson

Example 6A.1 provides a comprehensive illustration of the preparation of the operating activities section of the statement of cash flows under the indirect method.

EXAMPLE 6A.1

Operating Cash Flows:

Indirect Method 

PROBLEM: Aries Endoscope, Inc. presents the following income statement and select balance sheet accounts. Prepare the operating cash flows section of the cash flow statement using the indirect method:

Additional information:

SOLUTION: We begin with net income and adjust for noncash expenses. From the income statement [See Accounting: The Language of Business (Part 8)] and additional information, we identify depreciation expense of $27,000 as a noncash expense. We add this noncash expense back to net income. There are no cash revenues to include in the adjustments.

We then adjust for changes in the current assets and liabilities, according to Exhibit 6A.1, from Part 80 and a little too lengthy and cumbersome, for the sake of brevity and ease of reading, to reintroduce in this post. The following table identifies the balance sheet accounts, the change in each account, and how the change is presented in the operating cash flow section of the statement of cash flows. 

The completed operating activities section of the statement of cash flows under the indirect method follows. 

The Indirect Statement of Cash Flows: International Financial Reporting Standards (IFRS). IFRS does not specify the income level to use as the first line in the reconciliation of income to operating cash flows. As a result, a company can begin the reconciliation with net income or operating income. An in-depth discussion of this difference in the preparation of the statement of cash flows will be provided in a future post. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 300-302*

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