Statement Of Cash Flows Example Indirect Method

Statement of cash flows exampleindirect method is a practical way to see how a company’s net income translates into actual cash generated from its core operations. By adjusting net income for non‑cash items and changes in working‑capital accounts, the indirect method reveals the cash‑flow impact of everyday business activities without requiring a detailed cash‑receipts‑and‑payments ledger. This approach is widely used because most firms already prepare an income statement and a balance sheet, making the necessary adjustments readily available. Below, you’ll find a step‑by‑step walk‑through of an indirect‑method cash‑flow statement, complete with explanations, a full numeric example, and tips to avoid common mistakes.

Understanding the Statement of Cash Flows

The statement of cash flows is one of the three core financial statements, alongside the income statement and balance sheet. It categorizes cash movements into three sections:

1. Operating activities – cash generated or used by the company’s primary business operations.
2. Investing activities – cash flows related to the purchase or sale of long‑term assets (e.g., property, plant, equipment, investments).
3. Financing activities – cash flows from borrowing, repaying debt, issuing or buying back equity, and paying dividends.

While the direct method lists actual cash receipts and payments, the indirect method starts with net income and reconciles it to net cash provided by operating activities. This reconciliation highlights how accrual‑based earnings differ from cash‑based results.

Indirect Method Overview

The indirect method follows a simple logic:

• Start with net income (from the income statement).
• Add back non‑cash expenses (depreciation, amortization, depletion). - Adjust for gains or losses that are included in net income but do not involve cash (e.g., gain on sale of equipment).
• Add or subtract changes in working‑capital accounts (accounts receivable, inventory, accounts payable, accrued expenses).
• The resulting figure is net cash flow from operating activities.

Investing and financing sections are prepared the same way regardless of the method used; they rely on actual cash inflows and outflows from those categories.

Step‑by‑Step Example of Indirect Method

Assume the following simplified data for XYZ Corp. for the year ended December 31, 2024:

Step 1: Start with Net Income

Begin with the bottom line of the income statement.

Net income = $150,000

Step 2: Add Back Non‑Cash Expenses

Non‑cash charges reduce net income but do not outflow cash. Add them back.

• Depreciation expense: +$30,000 - Amortization: +$5,000

Subtotal after this step: $150,000 + $30,000 + $5,000 = $185,000

Step 3: Adjust for Gains/Losses on Asset Sales

Gains increase net income without providing cash; losses decrease net income but also do not involve cash outflow. Remove their effect.

• Gain on sale of equipment: –$8,000 (subtract because it inflated net income) Subtotal: $185,000 – $8,000 = $177,000

Step 4: Adjust for Changes in Working Capital

Changes in current assets and liabilities reflect cash tied up or released during the period.

Total working‑capital adjustment = –$12,000 + $7,000 + $9,000 + $4,000 = +$8,000

Add this to the running total: $177,000 + $8,000 = $185,000

Step 5: Compute Cash Flow from Operating Activities

The figure obtained after all adjustments is the net cash provided by operating activities.

Net cash from operating activities = $185,000

Investing and Financing Activities

Now we turn to the other two sections, which are prepared using actual cash transactions.

Investing Activities

• Cash paid for purchase of equipment: –$40,000
• Cash received from sale of equipment (gain already removed): assume $18,000 (book value $10,000 + gain $8,000)

Net cash used in investing activities = –$40,000 + $18,000 = –$22,000