How to prepare Statement of Cash Flows. Indirect Method

How do you prepare a statement of cash flows using the indirect method? In this step-by-step lecture, Professor Farhat shows how to build the statement of cash flows using the indirect method, converting accrual-based net income into operating cash flow and completing the investing and financing sections. You'll learn the four-step operating adjustment, how to handle non-cash items and gains, how to analyze working capital changes, and how to reconcile the total change in cash — core FAR skills for the CPA Exam. Ideal for accounting students and CPA candidates studying the statement of cash flows in intermediate accounting. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 5:08 — Four-step operating section process 16:36 — Investing section 19:13 — Financing section 22:43 — Reconciling the total change in cash and non-cash disclosures Frequently Asked Questions: What is the indirect method of the statement of cash flows? The indirect method starts with net income and adjusts it to arrive at cash from operating activities. It adds back non-cash expenses, removes gains and losses that belong to other sections, and adjusts for changes in working capital. Why is depreciation added back to net income? Depreciation and amortization are non-cash expenses that reduced net income but did not use cash. They are added back so that operating cash flow reflects only actual cash movements. Why is a gain on the sale of a plant asset subtracted in the operating section? A gain on the sale of a plant asset is an investing activity, not an operating one. It is subtracted from net income in the operating section so the full sale proceeds can be reported correctly under investing activities. How do changes in working capital affect operating cash flow? An increase in a current asset such as accounts receivable or inventory reduces cash, while an increase in a current liability such as accounts payable increases cash. These adjustments convert accrual net income into cash from operations. What are non-cash investing and financing activities? Non-cash investing and financing activities are significant transactions that do not involve cash, such as acquiring land by issuing bonds. They are excluded from the body of the statement but must be disclosed separately. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #FAR #statementofcashflows #indirectmethod #cashflow #intermediateaccounting #ProfessorFarhat #accountingstudents