GAAP allows the use of the direct method and the indirect method to convert accrual revenues and expenses to a cash basis. The FASB suggests using the direct method but the majority of companies use the indirect method. The indirect method starts with income reported on the income statement and adjusts for items that did not affect cash. The direct method reports cash receipts (inflows) and cash disbursements ( outflows) from operating activities in detail.
STEPS FOR THE INDIRECT METHOD
Step 1: Determine the change in cash. Subtract the beginning cash balance for the period being reported from the ending balance on the last balance sheet.
Step 2: Determine cash flows from operating activities. Eliminate all non-cash transactions that did not increase or decrease cash from operating activities. Increases in current assets or decrease in current liabilities indicate use of cash, and decreases in current assets or increases in current liabilities show sources of cash.
Step 3: Determine the cash flows from investing activities. Compare the beginning and ending balances of long-term assets.
Step 4: Determine the cash flows from financing activities. Compare beginning and ending balances for long-term liabilities and stockholders equity. An increase in a stockholder’s equity account is a source of cash and a decrease is a use of cash.
Step 5: Prepare the statement of cash flows.
This Zempower blog focuses on increasing your Financial IQ. Mr. Taniguchi works with businesses to provide merchant cash advance loans within five to seven days based on credit card revenue receipts. He holds the position of Chief Financial Officer with several companies and also does bookkeeping, corporate valuations, financial consulting, and prepares merger & acquisitions packages for other businesses on the side. If you’d like to get updated blogs, please “Like” facebook.com/zempower.
