Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.
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.
Indirect method starts with the heading net income further proceeded by depreciation and then recording increase and decrease in assets and liabilities.
Step 1: Compute cash flows from operating activities using 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 reviewing equity 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 schedule disclosing non-cash investing and financing activity.
Classifying cash flow items Consider the following transactions:
Identify the category of the statement of cash flows in which each transaction would be reported.
Computing cash flow items—direct method Consider the following facts:
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