Indirect Approach to Presenting Operating Activities

As an alternative to the direct approach, companies may present an indirect statement of cash flows. The indirect approach is mostly a repackaging of the information found in the direct approach. It is so named because the "reconciliation" replaces the direct presentation of the operating cash flows. The indirect approach is presented on the following page. Except for the shaded areas, this statement is identical to the direct approach: The first shaded area reflects the substitution of the operating cash flow calculations. The second shaded area reflects a rule that the indirect approach must be supplemented with information about cash paid for interest and taxes (these amounts are found in the operating activities section of the direct approach).

Using a Worksheet to Prepare a Statement of Cash Flow

Given enough time and careful thought, one can generally prepare a statement of cash flows by putting together a rough shell that approximates the statements illustrated throughout this chapter, and then filling in all of the bits and pieces that can be found. Ultimately, the correct solution is reached when the change in cash is fully explained. This is like working a puzzle without reference to a supporting picture. But, complex tasks are simplified by taking a more organized approach. To that end, consider the value of a worksheet for preparing the statement of cash flows.

The worksheet examines the change in each balance sheet account and relates it to any cash flow statement impacts. Once each line in the balance sheet is contemplated, the ingredients of the cash flow statement will be found! A sample worksheet for Emerson is presented on the following page. In this worksheet, the upper portion is the balance sheet information, and the lower portion is the cash flow statement information. The change in each balance sheet row is evaluated and keyed to a change(s) in the cash flow statement. When you have explained the change in each balance sheet line, you should have accumulated (in the lower portion) the information necessary to prepare a statement of cash flows.

Emerson Corporation/Cash Flow Statement Worksheet/For the Year Ending Dec. 31, 20X5

Specific explanations for each keyed item are found in the table below. The cash flow statement explanations are color coded such that blue is the final balancing step, red is cash outflow, black is cash inflow, and green is special.