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Terms in this set (20)

The indirect method of presenting cash flows from operations reconciles net income to operating cash flows:
-->both the t-account worksheet and the cash flow from operations section of the actual statement of cash flows, for the indirect method, start with the provisional assumption that all earnings produce cash from operations.
--> subsequent additions and subtractions adjust for transactions where that assumption is invalid.

Not all expenses decrease cash and not all sales/revenues produce cash.
-->To calculate cash from operations, we must add back to net income the amounts of expenses that do not use cash in this period but instead use non-cash net assets in this period and visa versa for profits.

Examples:
1: depreciation expense
-->analytic entry for depreciation expense adds back depreciation expense to Net income in calculating cash flow from operations.
2: Dividends:
-->Dividends reduce retained earnings and cash.
-->paying cash dividends is a financing activity on the statement of cash flows

Once the t-account worksheet reflects the supplementary information, we must make inferences about the reasons for the remaining changes in the non cash balance sheet accounts.

3: Accounts Receivable:
-->The amount of the increase (decrease) n AR is the amount that must be subtracted from (added to) net income to calculate cash from operations.
-->inventory
-->PP&E
-->Long term investments
-->Accounts Payable
-->Accrued liabilities
-->Bonds Payable

Analytic entries explain all changes in the non-cash t-accounts and show annotations in the components of change in the cash account.