Editing Cash flow statement (section)

===Indirect method===
The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.<ref>Epstein, p. 94.</ref>

====Rules (operating activities)====
{| class="wikitable" style="float:right; margin: 0 0 0 10px"
|+ align="bottom"  style="color:#817679;"|''*Non-cash expenses must be added back to NI. Such expenses may be represented on the balance sheet as decreases in long term asset accounts. Thus decreases in fixed assets increase NI.''
|-
! colspan="2"|'''To Find Cash Flows'''<br />''from Operating Activities''<br />'''using the Balance Sheet and Net Income'''
|-
! colspan="1"|'''For Increases in'''
! colspan="1"|'''Net Inc Adj'''
|-
| Current Assets (Non-Cash)
| align="right"|Decrease
|-
| Current Liabilities
| align="right"|Increase
|-
! colspan="1"|'''For All Non-Cash'''...
! colspan="1"|
|-
| ''*Expenses'' ('''Decreases''' in Fixed Assets)
| align="right"|Increase
|-
|}
The following rules can be followed to calculate Cash Flows from Operating Activities when given only a two-year comparative balance sheet and the Net Income figure. Cash Flows from Operating Activities can be found by adjusting Net Income relative to the change in beginning and ending balances of Current Assets, Current Liabilities, and sometimes Long Term Assets. When comparing the change in long term assets over a year, the accountant must be certain that these changes were caused entirely by their devaluation rather than purchases or sales (i.e. they must be operating items not providing or using cash) or if they are non-operating items.<ref>{{cite book |author=Wild, John Paul |title=Fundamental Accounting Principles |date=May 2006 |edition=18th |publisher=McGraw-Hill Companies |location=New York |pages=630–633 |isbn=0-07-299653-6 }}</ref>
*Decrease in non-cash current assets are added to net income
*Increase in non-cash current asset are subtracted from net income
*Increase in current liabilities are added to net income
*Decrease in current liabilities are subtracted from net income
*Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period)
*Revenues with no cash inflows are subtracted from net income
*Non operating losses are added back to net income
*Non operating gains are subtracted from net income

The intricacies of this procedure might be seen as,

<math>\text{Net Cash Flows from Operating Activities} =   \text{ Net Income} + \text{Rule Items}</math>

For example, consider a company that has a net income of $100 this year, and its A/R increased by $25 since the beginning of the year. If the balances of all other current assets, long term assets and current liabilities did not change over the year, the cash flows could be determined by the rules above as $100 – $25 = Cash Flows from Operating Activities = $75. The logic is that, if the company made $100 that year (net income), and they are using the accrual accounting system (not cash based) then any income they generated that year which has not yet been paid for in cash should be subtracted from the net income figure in order to find cash flows from operating activities. And the increase in A/R meant that $25 of sales occurred on credit and have not yet been paid for in <u>cash</u>.

In the case of finding Cash Flows when there is a change in a fixed asset account, say the Buildings and Equipment account decreases, the change is added back to Net Income. The reasoning behind this is that because Net Income is calculated by, Net Income = Rev - Cogs - Depreciation Exp - Other Exp then the Net Income figure will be decreased by the building's depreciation that year. This depreciation is not associated with an exchange of cash, therefore the depreciation is added back into net income to remove the non-cash activity.

====Rules (financing activities)====
Finding the Cash Flows from Financing Activities is much more intuitive and needs little explanation. Generally, the things to account for are financing activities:
*Include as outflows, reductions of long term notes payable (as would represent the cash repayment of debt on the balance sheet)
*Or as inflows, the issuance of new notes payable
*Include as outflows, all dividends paid by the entity to outside parties
*Or as inflows, dividend payments received from outside parties
*Include as outflows, the purchase of notes stocks or bonds
*Or as inflows, the receipt of payments on such financing vehicles.{{Citation needed|date=November 2010}}
In the case of more advanced accounting situations, such as when dealing with subsidiaries, the accountant must
*Exclude intra-company dividend payments.
*Exclude intra-company bond interest.{{Citation needed|date=November 2010}}
A traditional equation for this might look something like,

:<math>\begin{alignat}{2}\text{Net Cash Flows from Financing Activities} = & \left[\text{Dividends received from }3^{{\rm rd}}\text{ parties}\right]\\   & -\left[\text{Dividends paid to }3^{{\rm rd}}\text{ parties}\right]\\ & - [\text{Dividends paid to NCI but not} \\ & \text{intracompany dividend payments}] \end{alignat}</math>

'''Example: cash flow of XYZ''':<ref>
[https://finance.yahoo.com/q/cf?s=C&annual Yahoo finance report on Citigroup]
</ref><ref>{{Cite web |url=http://www.citigroup.com/citigroup/fin/ar.htm |title=Citigroup finance report |access-date=2004-11-10 |archive-date=2008-06-21 |archive-url=https://web.archive.org/web/20080621093433/http://www.citigroup.com/citigroup/fin/ar.htm |url-status=dead }}</ref><ref>Bodie, p. 455.</ref>

{| class="wikitable"
|colspan="4" align="center"|'''XYZ co. Ltd. Cash Flow Statement'''<br />(all numbers in millions of Rs.)
|-
|''Period ending''
|align="right"|''31 Mar 2010''
|align="right"|''31 Mar 2009''
|align="right"|''31 Mar 2008''
|-
|'''Net income'''
|align="right"|'''21,538'''
|align="right"|'''24,589'''
|align="right"|'''17,046'''
|-
|colspan="4"|'''Operating activities, cash flows provided by or used in:'''
|-
|Depreciation and amortization
|align="right"|2,790
|align="right"|2,592
|align="right"|2,747
|-
|Adjustments to net income
|align="right"|4,617
|align="right"|621
|align="right"|2,910
|-
|Decrease (increase) in accounts receivable
|align="right"|12,503
|align="right"|17,236
|align="center"| --
|-
|Increase (decrease) in liabilities (A/P, taxes payable)
|align="right"|131,622
|align="right"|19,822
|align="right"|37,856
|-
|Decrease (increase) in inventories
|align="center"| --
|align="center"| --
|align="center"| --
|-
|Increase (decrease) in other operating activities
|align="right"|(173,057)
|align="right"|(33,061)
|align="right"|(62,963)
|-
|&nbsp;&nbsp;&nbsp;&nbsp;'''Net cash flow from operating activities'''
|align="right"|13
|align="right"|31,799
|align="right"|(2,404)
|-
|colspan="4"|'''Investing activities, cash flows provided by or used in:'''
|-
|Capital expenditures
|align="right"|(4,035)
|align="right"|(3,724)
|align="right"|(3,011)
|-
|Investments
|align="right"|(201,777)
|align="right"|(71,710)
|align="right"|(75,649)
|-
|Other cash flows from investing activities
|align="right"|1,606
|align="right"|17,009
|align="right"|(571)
|-
|&nbsp;&nbsp;&nbsp;&nbsp;'''Net cash flows from investing activities'''
|align="right"|(204,206)
|align="right"|(58,425)
|align="right"|(79,231)
|-
|colspan="4"|'''Financing activities, cash flows provided by or used in:'''
|-
|Dividends paid
|align="right"|(9,826)
|align="right"|(9,188)
|align="right"|(8,375)
|-
|Sale (repurchase) of stock
|align="right"|(5,327)
|align="right"|(12,090)
|align="right"|133
|-
|Increase (decrease) in debt
|align="right"|101,122
|align="right"|26,651
|align="right"|21,204
|-
|Other cash flows from financing activities
|align="right"|120,461
|align="right"|27,910
|align="right"|70,349
|-
|&nbsp;&nbsp;&nbsp;&nbsp;'''Net cash flows from financing activities'''
|align="right"|206,430
|align="right"|33,283
|align="right"|83,311
|-
|Effect of exchange rate changes
|align="right"|645
|align="right"|(1,840)
|align="right"|731
|-
|'''Net increase (decrease) in cash and cash equivalents'''
|align="right"|2,882
|align="right"|4,817
|align="right"|2,407
|-
|}