The Statement of Cash Flows in a Nutshell: A Practical Approach

Abstract

Public companies are required to provide the statement of cash flows, and accounting majors are required to take the course that covers the statement of cash flows. The statement of cash flows can be prepared either by direct method or indirect method. Even when direct method is used, it is still required the first section of the statement be prepared by indirect method and provided as a reconciliation schedule in the notes, which means indirect method is required either by direct and indirect method.

Learning the indirect method, the focal issue is on the adjustments to net income under cash flows from operating activities because the rest of statement is prepared by direct method. The author suggested a different conceptual approach in his paper of this subject in 2021.

In this paper, a suggested practical approach is presented using an exercise question from one of the most popular intermediate accounting textbooks. The exercise question requires preparing a statement of cash flows using indirect method. Assuming the format of cash flows statement is given, it is illustrated how to fill out the cash flows statement in a step-by-step approach, following the suggested conceptual approach from his paper in 2021.

It is demonstrated in the current paper that the challenging exercise question can be done step-by-step following the order of steps shown in the illustration.

Combined with his suggested conceptual approach from 2021, the suggested step-by-step illustration in this paper is tested on students and found to be a step easier way for the students to learn the indirect method of cash flows statement.