Accounting: The Language of Business - Vol. 2 (Intermediate: Part 80)

Some of the scientists, I believe, haven't they been changing their opinion a little bit on global warming? There's a lot of differing opinions and before we react I think it's best to have the full accounting, full understanding of what's taking place.

George W. Bush

Statements of Financial Position and Cash Flows and the Annual Report (Part R)

by

Charles Lamson

Overview of the Preparation of the Statement of Cash Flows

 In the preceding parts of this analysis, the purpose of the statement of cash flows and its classifications were outlined. In the next few posts, an overview of the preparation of the statement is provided. An in-depth discussion of the preparation of the statement of cash flows is provided in upcoming posts.

Reporting Cash Flows from Operating Activities: Indirect Method

The indirect method begins with net income from the income statement (see Accounting: The Language of Business - Vol. 1 (Part 8)) and then reconciles the net income to net cash provided by operating activities. Reconciling items are separated into two groups:

• Adjustments for items such as depreciation expense and unrelated gains and losses.

• Changes in operating assets and liabilities such as increases in accounts payable or decreases in inventory.

Exhibit 6A.1 shows the effects of changes in specific common current assets and current liabilities.

EXHIBIT 6A.1 The Effect of Changes in Current Assets and Current Liabilities

Part 81 will show an example that provides a comprehensive illustration of the preparation of the operating activities section of the statement of cash flows under the indirect method. Stay tuned . . .

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 299-300*

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