The alternative is to deduce the cash flows that occurred during the period from information in the company's income statement and its balance sheets at the beginning and end of the period. As this example suggests, all you need to identify most of the cash flows that take place during an accounting period is an income statement, comparative balance sheets, and an understanding of what makes particular accounts go up and down. Shown below are the 1997 income statement and comparative balance sheets for Z Corp. Use this information to prepare the company's statement of cash flows for 1997. In the statement of cash flow s , cash from operations can be presented using either the direct method or the indirect method .
Most companies report cash from operations using the indirect method .
Start with net income for the period. Then make the following adjustments. Subtract any nonoperating gains , and add back any nonoperating losses . Add back any purely noncash operating expenses, such as depreciation expense for property and equipment and amortization expense for intangible assets. As an example, if the balance sheet shows an increase in a noncurrent deferred tax liability, tax expense on the income statement is greater than tax currently payable by that amount.