Relic Spotters cash paid the supplier was 40,000.
Is that good or bad?
Well, you can't tell without some kind of benchmark.
You could look at prior your numbers to see if there's a trend, but
what we really want to know is what was the level of activities surrounding
this cash collection during the year.
For example, if Relic Spotter had 157,000 of revenue and
collected 156,300 in cash, then the cash flow makes sense.
But if Relic Spotter had 500,000 in revenue, but
only collect 156,300, then there may be a problem.
Or let's say that Relic Spotter sold 40,000 of inventory,
paid 40,000 to their suppliers.
Again, the cash flow makes sense, but
what if Relic Spotter only sold 10,000 of inventory?
Then the question is why did they spend an extra 30,000 in cash to acquire inventory
they didn't sell?
What the indirect method's going to do is start with net income as a benchmark for
the expected level of activity or expected level of cash flows during the period and
then highlight any discrepancies from that level.
This is the kind of things we will talk about when we do an analysis of
an indirect cash flow statement after we finally put one together later
in the video.
Now we're going to do the indirect method, which we'll be what we'll show on
the final cash flow statement for Relic Spotter.
We're going to go step by step following the algorithm that I did before,
starting with net income.
So, I pulled up the income statement.
Now at the bottom line, we can see net income was $2,370.
So on our indirect method cash flow statement,
we start at the top with net income of 2,370.
Notice I already have the answer at the bottom, net cash and operations of 17,400.
Because whatever we do in this section,
we have to get the same answer that we got under the direct method.
So far, so good.
Next step in our algorithm was to adjust your components of net income tied to
non-cash items or investing activities.
We can ignore investing activities for Relic Spotter,
because they didn't have any gains or losses on sale PP&E or investments.
So it really involves adding back the depreciation, amortization.
Here is the income statement again.
We had metal detector depreciation of 3,000.
Software amortization expense of 350 and building appreciation expense of 1,500.
I'm going to combine those into one line item called depreciation and
amortization of 31,850, and
we're going to add that back to remove that non-cash expense from net income.