Explain briefly the steps in preparing Cash flow statements using the indirect method

Below are tabulated the various basic steps to prepare cash flow statement using the indirect method:

Basic steps using indirect method to prepare cash flow statement:

  1.  Set out the proforma cash statement with the headings required by accounting standard. Leave plenty of space. Ideally use three or more sheets of paper, one for the main statement, one for the notes and one for the workings. It is therefore essential that one should know the format of indirect method of cash flow statement well.
  2. Begin with the reconciliation of operating profit to net cash from operating activities. When preparing the statement from balance sheets, you usually need to compute depreciation, loss on sale of non-current assets, profit for the year and tax paid.(step 4).  If the tax charge is not given in the income statement, you need to assume that the tax paid in the year is last year’s year-end provision and compute the charge as the balancing figure
  3. Calculate the cash flow figures for dividends paid, purchase or sale of non-current assets, issue of shares and repayment of loans if these are not already given to you
  4. If the profit figure is not given, open up a working for the trading, income and expense account. Using the opening and closing balances, the taxation charges and dividends paid and proposed, the profit for the year can be computed as a balancing figure to put in the net profit to net cash flow from operating activities section.
  5. Slot in the figures computed from step 1 to 4 to complete the cash flow statement.


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