Statement of Cash Flows. CPA Exam Simulation
How do you prepare a statement of cash flows using the indirect method on the CPA exam? This FAR-focused simulation walks through building a full statement of cash flows from balance sheet accounts and notes when no formal income statement is provided. Professor Farhat helps accounting students and CPA, CMA, and EA candidates work through operating, investing, and financing activities and reconcile to the ending cash balance.
Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.
Video Timeline & Key Concepts:
0:00 — Introduction
0:12 — Operating activities under the indirect method
4:15 — Deriving net income from retained earnings and dividend data
6:02 — Adjusting for non-cash expenses, gains, and losses
14:06 — Changes in working capital accounts and their cash impact
16:27 — Investing activities: equipment, buildings, and insurance proceeds
20:11 — Sale of investments
20:50 — Financing activities: dividends, notes payable, and non-cash transactions
Frequently Asked Questions:
What is the indirect method for the statement of cash flows?
The indirect method starts with net income and adjusts it to arrive at cash from operating activities. It removes non-cash items such as depreciation and gains or losses and adjusts for changes in working capital accounts to convert accrual net income into cash flow.
How do you find net income when no income statement is given?
You can derive net income from the change in retained earnings. Beginning retained earnings plus net income minus dividends equals ending retained earnings, so rearranging that relationship lets you solve for net income using the retained earnings balances and dividend data.
Why are non-cash expenses and gains or losses adjusted in operating activities?
Items such as depreciation, amortization, and gains or losses on asset sales affect net income but do not involve operating cash. They are added back or removed so that operating cash flow reflects only actual cash generated by operations, with asset sale proceeds shown in investing.
How do changes in working capital affect cash flow?
Increases in current assets like accounts receivable or inventory use cash, while increases in current liabilities like accounts payable provide cash. Each change is added or subtracted from net income to reflect its effect on operating cash flow.
How are non-cash financing and investing transactions handled?
Non-cash transactions, such as issuing stock to settle debt or issuing debt to acquire equipment, do not appear in the three main sections because no cash changes hands. Instead, they are disclosed separately as significant non-cash investing and financing activities.
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