Combination of the income statement and a statement of cash flows under the indirect method
- Adjust each income statement item for its corresponding balance sheet account
- Eliminate non-cash and non-operating transactions
Cash collections from customers
- Begin with Sales from income statement (this is recognized, not necessary realized)
- Subtract any increase in accounts receivable
- Add an increase in unearned revenue
Cash payment to suppliers
- Begin with cost of goods sold (COGS)
- If depreciation have been included in COGS this must be added back to cash paid to suppliers
- Reduce COGS by any increase in accounts payable
- Add increase in inventory in balance sheet
- Subtract inventory write-off that occurred during this period
Notes
- Inventory write-off
- Apply the lower of cost or market rule
- Reduce ending inventory and increase COGS
- No cash flow associated with the write-off
