Chapter21: The Statement of Cash Flows Revisited
Appendix 21A: Spreadsheet for the Indirect Method
A spreadsheet is equally useful in preparing a statement of cash flows whether we use the direct or the indirect method of determining cash flows from operating activities. The format of the spreadsheet differs only with respect to operating activities. The analysis of transactions for the purpose of identifying cash flows to be reported is the same. To illustrate, Illustration 21A-1 on the next page provides a spreadsheet analysis of the data for UBC.
Two differences should be noted between the spreadsheet in Illustration 21A-1 and the spreadsheet we used earlier for the direct method. First, in the statement of cash flows section of the spreadsheet, under the heading of “cash flows from operating activities,” specific cash inflows and cash outflows are replaced by net income and the required adjustments for noncash effects. Second, we do not include an income statement section. This section is unnecessary because, using the indirect method, we are not interested in identifying specific operating activities that cause increases and decreases in cash. Instead, we need from the income statement only the amount of net income, which is converted to a cash basis by adjusting for any noncash amounts included in net income. The spreadsheet entries in journal entry form for the indirect method are illustrated in Illustration 21A-2 on page 1227.
Remember that there is no mandatory order in which the account changes must be analyzed. However, since we determine net cash flows from operating activities by working backwards from net income when using the indirect method, it is convenient to start with the spreadsheet entry that represents the credit to retained earnings due to net income. This entry corresponds to summary entry (11) using the direct method. By entering the debit portion of the entry as the first item under the cash flows from operating activities (CFOA), we establish net income as the initial amount of cash flows from operating activities, which is then adjusted to a cash basis by subsequent entries. Entries (2)–(4) duplicate the transactions that involve noncash components of net income. Changes in current assets and current liabilities that represent differences between revenues and expenses and the cash effects of those revenues and expenses are accounted for by entries (5)–(11). Summary entries (12)–(19) explain the changes in the balance sheet not already accounted for by previous entries, and are identical to entries (12)–(19) recorded using the direct method.p. 1226
The statement of cash flows presenting net cash flows from operating activities by the indirect method is illustrated in Illustration 21A-3.