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. 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. From the income statement, take net income, depreciation, depletion, and amortization expense, and any gains or losses on the sale of long-term assets. From the comparative balance sheets, compute the increase or decrease in each current asset and current liability account.

Cash Flow Template: Operating Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation/depletion/amortization expense Loss on sale of long-term assets - Gain on sale of long-term assets Increases in current assets other than cash Decreases in current assets other than cash Increases in current liabilities Decreases in current liabilities = Net cash provided by operating activities The first step to prepare the operating section of the cash flow statement is to lay out the template as shown above.

Investing - Calculating Cash Flow Amounts 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 Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

Investing - Calculating Cash Flow Amounts Cash Flows from Investing Activities + Sales of long-term assets - Purchases of long-term assets Collections of notes receivable Loans to others = Net cash provided by (used for) investing activities Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

Financing - Calculating Cash Flow Amounts 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 Investing activities affect long-term assets, such as plant assets, investments and notes receivable. Above is a template for the investing section for the statement of cash flows.

Financing - Calculating Cash Flow Amounts Cash Flows from Financing Activities + Issuance of stock - Purchase of treasury stock Borrowing Payment of notes and bonds payable Payment of dividends Net cash provided by (used in) financing activities Financing activities affect liabilities and stockholders’ equity, such as Notes payable, Bonds payable, Long-term debt, Common stock, Paid-in capital in excess of par, and Retained earnings. A template for the financing activities section of the Statement of Cash Flows is shown above.

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)