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The statement of cash flows is prepared by following these steps:
Step 1: Determine Net Cash Flows from Operating Activities
Using the indirect method, operating net cash flow is calculated as follows:
- Begin with net income from the income statement.
- Add back noncash expenses, such as depreciation, amortization, and depletion.
- Remove the effect of gains and/or losses from disposal of long-term assets, as cash from the disposal of long-term assets is shown under investing cash flows.
- Adjust for changes in current assets and liabilities to remove accruals from operating activities.
Step 2: Determine Net Cash Flows from Investing Activities
- Investing net cash flow includes cash received and cash paid relating to long-term assets.
Step 3: Present Net Cash Flows from Financing Activities
- Financing net cash flow includes cash received and cash paid relating to long-term liabilities and equity.
Step 4: Reconcile Total Net Cash Flows to Change in Cash Balance during the Period
- To reconcile beginning and ending cash balances:
- The net cash flows from the first three steps are combined to be total net cash flow.
- The beginning cash balance is presented from the prior year balance sheet.
- Total net cash flow added to the beginning cash balance equals the ending cash balance.
Step 5: Present Noncash Investing and Financing Transactions
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