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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 81)

All that Lenin learned about business from the tales of his comrades who occasionally sat in business offices was that it required a lot of scribbling, recording, and ciphering. Thus, he declares that accounting and control are the chief things necessary for the organizing and correct functioning of society. . . . Here we have the philosophy of the filing clerk in its full glory.

Ludwig von Mises

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

by

Charles Lamson

Example 6A.1 provides a comprehensive illustration of the preparation of the operating activities section of the statement of cash flows under the indirect method.

EXAMPLE 6A.1

Operating Cash Flows:

Indirect Method 

PROBLEM: Aries Endoscope, Inc. presents the following income statement and select balance sheet accounts. Prepare the operating cash flows section of the cash flow statement using the indirect method:

Additional information:

SOLUTION: We begin with net income and adjust for noncash expenses. From the income statement [See Accounting: The Language of Business (Part 8)] and additional information, we identify depreciation expense of $27,000 as a noncash expense. We add this noncash expense back to net income. There are no cash revenues to include in the adjustments.

We then adjust for changes in the current assets and liabilities, according to Exhibit 6A.1, from Part 80 and a little too lengthy and cumbersome, for the sake of brevity and ease of reading, to reintroduce in this post. The following table identifies the balance sheet accounts, the change in each account, and how the change is presented in the operating cash flow section of the statement of cash flows. 

The completed operating activities section of the statement of cash flows under the indirect method follows. 

The Indirect Statement of Cash Flows: International Financial Reporting Standards (IFRS). IFRS does not specify the income level to use as the first line in the reconciliation of income to operating cash flows. As a result, a company can begin the reconciliation with net income or operating income. An in-depth discussion of this difference in the preparation of the statement of cash flows will be provided in a future post. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 300-302*

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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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