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What is the indirect method for preparing a cash flow statement?

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Quick Answer

The indirect method for preparing a cash flow statement is used to show the uses and sources of cash by a business. It is the preferred method by most companies because the information required to prepare it is fairly easy to assemble from accounts that a company usually maintains. However, the indirect method does not clearly show how cash flows through a business, which is shown in the direct method.

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What is the indirect method for preparing a cash flow statement?
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To present the cash flow statement prepared using the indirect method, cash flows are separated into the general classifications of operating activities, investing activities and financing activities. Cash flow from operating activities is calculated by starting with net income, adding non-cash expenses, such as amortization and depreciation, adding losses and subtracting gains for sales on assets, accounting for any changes in non-cash current assets and any changes in current assets and liabilities except notes and dividends payable. Cash flow from investing activities includes money related to the purchase and sale of marketable securities and long-term assets, making new loans and collecting on existing loans. Cash flow from financing activities includes money related to the issue and buyback of capital stock, borrowing for new loans, repayment of existing loans on either a short or long-term basis and dividends paid.

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