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Managerial Accounting1
Managerial Accounting1
indirect method
A Three-Step Process
•Indirect Method
adjusts net income to
net cash provided by
operating activities
using a three-step
process.
A Three-Step Process
Step 1:
The first step is to add depreciation
charges to net income.
Depreciation Charges are the
credits to the Accumulated
Depreciation account during the
period – the sum total of the entries
that have increased Accumulated
Depreciation.
To compute the credits to the Accumulated Depreciation
account use the equation for contra-assets:
Example:
Assume the Accumulated Depreciation account had
beginning and ending balances of $300 and $500,
respectively. Also, assume that the company sold equipment with
accumulated depreciation of $70 during the period.
Beginning Balance – Debits + Credits = Ending Balance
$300 - $70 + Credits = $500
Credits = $500-$300+$70
Credits = $270
Accumulated Depreciation T-account
Accumulated Depreciation
End. Bal. $500
For service and merchandising companies, the credits
to the Accumulated Depreciation T-account equal the
debits to the Depreciation Expense account.
To make adjustment,
Subtract gains from net income and
add losses to net income in the
operating activities section.
Investing and
Financing
Activities: This Photo by Unknown author is licensed under CC BY-SA.
Gross Cash
Flows
U.S. GAAP and IFRS require that the
investing and financing sections of the
statement of cash flows disclose gross cash
flows.
End. Bal. $1,800
qRetained Earnings
- When a company earns net income it
credits the Retained Earnings account
and when it pays a dividend it debits
the Retained Earnings Account.
Retained Earnings
Investing Activities
Purchase of Property, plant, and equipment (xx)
Sale of property, plant, and equipment xx
Purchase of long-term investments (xx)
Sale of long-term investments xx
Net cash provided by (used in) investing activities (xx)
Key Concept #4
The investing and financing sections of the statement
of cash flows must report gross cash flows:
Financing Activities
Issuance of bonds payable (xx)
Replaying principal on bonds payable xx
Issuance of common stock (xx)
Purchase own shares of common stock (xx)
Paying dividend (xx)
Net cash provided by (used in) financing activities xx
Key Concept #4
The investing and financing sections of the statement
of cash flows must report gross cash flows:
Ending Beginning
Stockholders' Equity Balance Balance Change
Common Stock.............................. 157 155 +2
Retained Earnings ............................ 1,009 897 +112
Total Stockholders' equity .................... 1,166 1,052
Total liabilities and
Stockholders' equity .......................... $ 2,177 $ 2,053