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Indirect Method Example ISSUING BONDS AT A DISCOUNT

 East, Inc. reports $125,000 net income for the Example: On January 1, 2025, a corporation
year ended Dec. 31, 2009. sells $1,000,000, 5 year, 10% bonds at 98%.
 Accounts Receivable increased by $7,500 Interest is payable on July 1 and January 1.
during the year and Accounts Payable
Entries to record the sale on January 1:
increased by $10, 000.
 During 2009, East reported $12,500 of Cash Bonds Payable
Depreciation Expense.
980,000 1,000,000
What is East, Inc.’s Operating Cash Flow using the indirect
method for 2009?

Indirect Method Example Discount on Bonds Payable

Net income $125,000 20,000 1,000,000 * 10% = 100,000


ADD: Depreciation expenses 12,500 (July: 50,000 & January: 50,000)
DEDUCT: Increase in accounts receivable 7500
*The account Discount on Bonds Payable is a
ADD: Increase in accounts payable 10,000
contra account. On the balance sheet, it is
Cash provided by operating activities $140,000 deducted from the long term-liability Bonds
Payable
*If we used the Direct Method, we would get the same
$140,000 for Cash Provided by Operating Activities.

Summary of Adjustments (Operating Activities)

1. Non-Cash Expenses (e.g. depreciation &


amortization) are added to net income
2. Current Assets
a. Increases in current asset balances
are subtracted from income
b. Decreases in current balances are
added to net income
3. Current Liabilities
a. Increases in current liability
balances are added to net income
b. Decreases in current liability
balances are subtracted from net
income
4. Non-operating items
a. Gains in non-operating items are
subtracted from net income
b. Losses in non-operating items are
added to net income

Statement of Cash Flow


Operating activities | Investing activities |Financiaactivities