Begin with the balance sheet data by taking the cash balance from the most recent balance sheet and subtracting the
cash balance from the prior year. The cash flow statement must balance to this control number.
Next, determine the change in each balance sheet account.
It is necessary to determine if the balance change is an inflow or an outflow of cash or a source or use of cash. An
increase in an asset balance results in a cash outflow. While a decrease in a liability or equity account, has the opposite effect.
Determine if each change in account balance is an I) operating, II) investing or III) financing activity.
Cash Effects of Balance Sheet Account Changes
Cash Inflow
Decrease in an Asset Account ( - )
Increase in a Payable Account
Increase in an Equity Account
Cash Outflow
Increase in an Asset Account
Decrease in a Payable Account ( - )
Decrease in an Equity Account ( - )
Using the Indirect Method, cash flows from Operating Activities are reported by adjusting net income for revenues, expenses, gains, and losses that appear on the income statement but do
not have an effect on cash.