Operating Activities – Calculating Cash Flow Amounts (indirect)  Steps for preparing the Operating Section: Net Income - always start with the Net Income figure.  Net income approximates cash flow, so it is a good starting point. Next, reverse the impact of Non-cash Expenses to the Net Income figure. Next, reverse the impact Gains and Losses on sales of long-term assets to the Net Income figure (full value of sale is shown in investing section). Last, compare the current year and prior year account balances for all of the current asset and current liability accounts to recognize the cash impact of the change. 1

Check-in’s – Operating Section  For the indirect method, the operating section begins with net income? True or False (Circle one)  For the indirect method, the depreciation is subtracted from net income? True or False (Circle one)  For the indirect method, a gain is added back to net income? True or False (Circle one)  If inventory account increased by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  If the accounts payable account decreased by $10,000 from the prior accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

Investing - Calculating Cash Flow Amounts 3 Each Long-term Asset account is reviewed for changes to see if the change resulted in a source or use of cash. Long-term asset account changes (except accumulated depreciation/amortization) Increase long-term asset account – Use of Cash Decrease long-term asset account – Source of Cash

Check-in’s – Investing Section  The investing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)  When an asset is sold, only the gain or loss is listed in the investing section. True or False (Circle one)  When an asset is sold, the amount of cash received for the sale is shown in the investing section, regardless of any gain or loss recognized. True or False (Circle one)  If a notes receivable has been paid down by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  If new equipment is purchased in the amount of $10,000 during this accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

Financing - Calculating Cash Flow Amounts 5 Financing activities affect long-term liabilities and stockholders’ equity. Each long-term liability and stockholders’ equity account is reviewed for changes to see if the change resulted in a source or use of cash. Long-term liability and stockholders’ equity account changes Increase in account – Source of Cash Decrease in account – Use of Cash Exceptions – Treasury Stock and Dividends

Check-in’s – Financing Section  The financing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)  If treasury stock (acquired in a prior accounting period) is reissued in the amount of $10,000 during this accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  A new bond with a face value of $100,000 is issued at a discount and the bonds payable account is credited for $90,000. This change is shown as a source of cash or a use of cash and how much ________________? (Circle One and fill in the blank)

Exercise #1: I = inflow (addition or source) O = outflow (subtraction or use) NCA – non-cash activity Exercise #2: Build a cash flow using the indirect method (next page, also)

Notes: Dividends = $5,000 Marketable securities sold for cash Long-term debt increased cash