Question

Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.

Short answer

Answer

There is a total of five steps to prepare the statement of cash flows by the indirect method.These steps include the preparation of operating, investing, financing, and non-cash transaction schedule.

Step-by-step solution

Indirect method of reporting operating activities

Indirect method starts with the heading net income further proceeded by depreciation and then recording increase and decrease in assets and liabilities.

Steps used to prepare the statement of cash flows by the indirect method

Step 1: Compute cash flows from operating activitiesusing net income. Net income shall be adjusted by depreciation, gain or loss from long-term assets, and increases and (decreases) in current assets and current liabilities.

Step 2: Compute cash flows from investing activities by considering long-term asset transactions in the specific period.

Step 3: Compute cash flows from financing activities by reviewingequity and non-current liabilities.

Step 4: calculate the net increase or (decrease) in cash during the year. This figure should be added to the opening balance of cash and the resulting figure should match the cash reported on the balance sheet.

Step 5: At last prepare a separate scheduledisclosing non-cash investing and financing activity.