![]() Three general types of adjustments are necessary to convert net income to cash provided by operating activities. If the resulting adjusted amount is a cash inflow, it is called cash provided by operating activities if it is a cash outflow, it is called cash used by operating activities. How do we convert this amount to a cash basis?Īnswer: Several adjustments are necessary to convert this amount to a cash basis and to provide an amount related only to daily operating activities of the business. This amount comes from the income statement, which was prepared using the accrual basis of accounting. Home Store, Inc., had net income of $124,000 in 2012. (The direct method is covered in the appendix.) The starting point using the indirect method is net income. Question: We will be using the indirect method to prepare the operating activities section. ![]() Step 1: Prepare the Operating Activities Section It is important to note that all positive amounts shown in the statement of cash flows denote an increase in cash, and all negative amounts denote a decrease in cash. With these data and the information provided in Figure 12.3 "Balance Sheet and Income Statement for Home Store, Inc.", we can start preparing the statement of cash flows. Declared and paid $32,000 in cash dividends.Bonds were paid with a principal amount of $18,000.There were no sales of long-term investments Long-term investments were purchased for $12,000 cash.Sold equipment with a book value of $11,000 (= $21,000 cost − $10,000 accumulated depreciation) for $5,000 cash.Other pertinent data for 2012 are as follows: ![]() This information is presented in Figure 12.3 "Balance Sheet and Income Statement for Home Store, Inc.". Where do we start in preparing Home Store, Inc.’s statement of cash flows?Īnswer: As stated earlier, the information needed to prepare the statement of cash flows includes the balance sheet, income statement, and other selected data. Question: Now that you are familiar with the four key steps, let’s take a look at the statement of cash flows for Home Store, Inc. Prepare a statement of cash flows using the indirect method.Adding depreciation to cash spent and received in acquisition and disposal of long-term assets, respectively, would yield a misleading result. ![]() Investing cash flow measures in general how much the company has spent on acquisition and disposal of long-term assets on a cash basis. To get how much value the company has derived only through operating activities instead on a cash basis in the same period (which is operating cash flow), non-cash expenses such as depreciation and non-operating expenses and income, respectively, such as interest expenses and income, all of which are included in the income statement, and changes in operations-related balance sheet items such as receivables, inventory and payables are, as per necessary, added to or subtracted from net profit in the calculation via the indirect method. It is also deducted from revenues in calculation of net profit which shows how much value the company has derived in net on an accrual basis during the same period from all activities. Depreciation is the estimated wear & tear in a company's tangible assets during a certain period of time.
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