How to Convert an Accrual Basis Income Statement to Cash Basis


Accrual-based accounting records transactions whenever they occur. An inherent problem with this is the method's inability to accurately track cash. Companies may convert an accrual-basis income statement to a cash-basis method. This involves adjusting net income for items that have directly affected cash during the current time period. Accountants call this process the indirect statement of cash flow preparation method. Companies may prepare this statement of cash flows each month, along with the standard income statement and balance sheet.

  • List the current period's net income at the top of the indirect statement of cash flows report.

  • Create a section for operating activities. List separate lines on the report for increases and decreases in receivables, inventory accounts, payables, unearned revenues, depreciation, prepaid accounts and gains or losses from extraordinary items.

  • Place a second section just below the operating activities, called investing activities. List separate lines for cash inflows and outflows related to the purchase and sale of property, plant, equipment and marketable securities.

  • Create a final section for financing activities. List separate lines for receipt of payment of cash from stock and debt use.

  • Compute the total for each section list in Steps 2 through 4.

  • Add all three subtotals to net income listed at the top of the report. The difference---whether a positive or negative figure---represents total cash inflows or outflows for the month.

  • List all non-cash items needing disclosure on the bottom of the report. This is for informational purposes only.

Tips & Warnings

  • Each line in the three sections should report only the changes in the respective account. Changes represent the increase or decrease for the month when comparing ending account balances to ending account balances.


  • "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011
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