Operating Activities Presentation The operating activities section of the statement of cash flows can be presented under the direct method or the indirect method.
Exhibit—Converting Income Statement Amounts from the Accrual Basis to the Cash Basis—Direct Method
| Accrual Basis | Additions | Deductions | Cash Basis | |||
| Net sales | + | Beginning A/R | – | Ending A/R | = | Cash received from customers |
| Cost of goods sold | + | Ending inventory Beginning A/P | – | Manufacturing depreciation and amortization Beginning inventory Ending A/P | = | Cash paid to suppliers |
| Operating expenses | + | Ending prepaid expenses Beginning accrued expenses | – | Sales and administrative depreciation and amortization Beginning prepaid expenses Ending accrued expenses payable Bad debts expense | = | Cash paid for operating expenses |
Example 6.2: Operating Activities: Formats for Direct and Indirect Methods
| Direct Method | ||
| Cash flows from operating activities: | ||
| Cash received from sale of goods | $xxx | |
| Cash interest received | xxx | |
| Cash dividends received | xxx | |
| Cash provided by operating activities | $xxx | |
| Cash paid to suppliers | (xxx) | |
| Cash paid for operating expenses | (xxx) | |
| Cash interest paid | (xxx) | |
| Cash paid for taxes | (xxx) | |
| Cash disbursed for operating activities | (xxx) | |
| Net cash flows from operating activities | $xxx | |
| Indirect Method | ||
| Cash flows from operating activities: | ||
| Net income | $ xx | |
| Add/deduct items not affecting cash: | ||
| Decrease (increase) in accounts receivable | (xx) | |
| Depreciation and amortization expense | xx | |
| Increase (decrease) in accounts payable | xx | |
| Decrease (increase) in inventories | xx | |
| Loss on sale of equipment | ||
| Net cash flows from operating activities | $ xx | |
Example 6.3: Statement of Cash Consolidated Entities
A consolidated statement of cash flows must be presented when a complete set of consolidated financial statements is issued. The consolidated statement of cash flows would be the last statement to be prepared, as the information to prepare it will come from the other consolidated statements (consolidated statement of financial position, income statement, and statement of retained earnings). The preparation of a consolidated statement of cash flows involves the same analysis and procedures as the statement for an individual entity with a few additional items. When the indirect method is used, the additional noncash transactions relating to the business combination, such as the differential amortization, must also be reversed, and all transfers to affiliates must be eliminated, as they do not represent cash inflows or outflows of the consolidated entity.
All unrealized intercompany profits should have been eliminated in preparation of the other statements. Any income or loss allocated to noncontrolling parties would need to be added back, as it would have been eliminated in computing consolidated net income but does not represent a true cash outflow or inflow. Finally, only dividend payments that are not intercompany should be recorded as cash outflows in the financing activities section.
In preparing the operating activities section of the statement by the indirect method following a purchase business combination, the changes in assets and liabilities related to operations since acquisition should be derived by comparing the consolidated statement of financial position as of the date of acquisition with the year‐end consolidated statement of financial position. These changes will be combined with those for the acquiring company up to the date of acquisition as adjustments to net income. The effects due to the acquisition of these assets and liabilities are reported under investing activities.
Example 6.4: Cash and Cash Equivalents—Accounting Policy
The company considers all investments with original maturities of three months or less when purchased to be cash equivalents.
Example 6.5: Accounting Policy for Cash and Cash Equivalents, Including Details
Cash and cash equivalents consist of cash on hand and other highly liquid investments that are unrestricted as
