Final answer:
To prepare a statement of cash flows using the indirect method, one must adjust the net income with non-cash expenses, changes in working capital, and other items. Additionally, comparative statements would provide side-by-side comparisons of net income and cash flows from operations, highlighting the differences between accrual and cash basis accounting.
Step-by-step explanation:
To prepare a statement of cash flows using the indirect method for the year ended December 31, year 2, we would start with the net income for the year and adjust for non-cash expenses, changes in working capital, and non-operational cash flows. Examples of adjustments include adding back depreciation or amortization, adjusting for gains or losses on sales of assets, and changes in accounts such as receivables, payables, and inventory.
For part B, a comparative statement would present side-by-side the net income and the cash flows from operations. This comparison highlights the differences between the accrual basis of accounting (net income) and the cash basis (cash flow from operations). It shows how non-cash items and changes in working capital impact the cash available to the company.
A comparative statement based on net income would list the net income for two consecutive years side-by-side, allowing for a comparison of the company's performance over time. Similarly, a comparative statement based on cash flows from operations would compare the cash generated from operating activities over the same period.