There are two methods of reporting the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows.

Selected information from Rowe Publishing Company's Income Statement

Selected information from Rowe Publishing Company's Balance Sheets

Indirect method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 20Y8
Cash flows from operating activities:
Net income		$69,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$ 15,000
Changes in noncash current operating assets and liabilities:
Increase in accounts receivable	(9,000)
Increase in inventory	(20,000)
Increase in accounts payable	12,000
Increase in salaries payable	4,000
Decrease in income taxes payable	(7,000)	(5,000)
Net cash flows from operating activities		$ 64,000
Cash flows from investing activities:
Equipment purchase	($ 25,000)
Net cash used for investing activities		(25,000)
Cash flows from financing activities:
Repayment of notes payable	($ 35,000)
Proceeds from issuance of bonds payable	50,000
Payment of dividends	(35,000)
Net cash used for financing activities		(20,000)
Net increase (decrease) in cash		$ 19,000
January 1, 20Y8, cash balance		66,000
December 31, 20Y8, cash balance		$ 85,000

Notice that the difference between the two methods is the operating activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adds back non-cash items and increases and decreases in the balances in current assets.

Feedback

Compare the two statements to determine how the methods differ.

Comparative balance sheets for Byron Manufacturing as of December 31, 20Y8 and 20Y7 are shown. Complete the Changes column to determine net cash flows during the year.

Byron Manufacturing Balance Sheets As of December 31, 20Y8 and 20Y7
Assets	20Y8	20Y7
Current assets:
Cash	5,310	9,240
Accounts receivable	10,520	9,000
Inventory	19,640	18,550
Total current assets	35,470	36,790
Property, plant, and equipment
Building	493,000	493,000
Equipment	277,000	271,200
	770,000	764,200
Accumulated depreciation	(147,150)	(119,900)
Net property, plant, and equipment	622,850	644,300
Total assets	658,320	681,090
Liabilities and Equity
Current liabilities:
Accounts payable	55,230	35,920
Salaries payable	9,630	11,840
Income taxes payable	1,050	9,990
Total current liabilities	65,910	57,750
Long-term liabilities:
Bonds payable	351,000	399,000
Equity:
Common stock	181,000	148,000
Retained earnings	60,410	76,340
Total equity	241,410	224,340
Total liabilities and equity	658,320	681,090

Additional information needed to prepare the statement of cash flows using the indirect method:

1. Net income was $2,990
2. Byron paid $18,920 in cash dividends
3. Byron issued $48,740 in bonds payable for cash
4. Byron retired $96,740 in bonds with cash
5. No fixed assets were sold or disposed of during the period

Now prepare the statement of cash flows for Byron Manufacturing using the indirect method. Select Increase or Decrease and enter the amounts.

Byron Manufacturing Spreadsheet to Prepare the Statement of Cash Flows For the Year Ended December 31, 20Y8
	Beginning		Increase/Decrease			Ending
Balance Sheet Accounts	Balance		Debit	Credit		Balance
Cash					(m)
Accounts receivable	9,000	(h)	1,520			10,520
Inventory	18,550	(i)				19,640
Building	493,000					493,000
Equipment	271,200	(b)				277,000
Accumulated depreciation	119,900				(c)	147,150
Accounts payable	35,920			19,310	(j)	55,230
Salaries payable	11,840	(k)				9,630
Income taxes payable	9,990	(l)	8,940			1,050
Bonds payable	399,000	(e)			(d)	351,000
Common stock	148,000			33,000	(f)	181,000
Retained earnings	76,340	(g)			(a)	60,410
			Increase/Decrease in Cash
Statement of Cash Flows			Debit	Credit
Cash flow from operating activities
Net income		(a)
Adjustments to reconcile net income to net cash flow from operating activities
Depreciation expense		(c)
Increase in accounts receivable				1,520	(h)
Increase in inventory					(i)
Increase in accounts payable		(j)	19,310
Decrease in salaries payable					(k)
Decrease in income taxes payable				8,940	(l)
Cash flows from investing activities
Purchase equipment					(b)
Cash flows from financing activities
Issued bonds payable		(d)
Retired bonds payable					(e)
Issued common stock		(f)	33,000
Paid dividend					(g)
Net increase (decrease) in cash		(m)
			270,440	270,440

Now you can prepare the Statement of Cash Flows using the indirect method. Fill in the Statement based on the spreadsheet. Select Increase or Decrease and enter the amounts.

Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 20Y8
Cash flows from operating activities:
Net income		$
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$
Increase in accounts receivable	(1,520)
Increase in inventory
Increase in accounts payable	19,310
Decrease in salaries payable
Decrease in income taxes payable	(8,940)	32,800
Net cash provided by operating activities		$ 35,790
Cash flows from investing activities:
Purchase of equipment	$ (5,800)
Net cash used for investing activities		(5,800)
Cash flows from financing activities:
Proceeds from issuance of bonds payable	$
Retired bonds payable	(96,740)
Issued common stock
Payment of dividends	(18,920)
Net cash used for financing activities		(33,920)
Net increase (decrease) in cash		$
Cash, 1/1/20Y8
Cash, 12/31/20Y8		$