Something or someone of any value; any portion of one's property or effects so considered. Cash flows refer to inflows and outflows of cash from activities reported on an income statement. In short, they are elements of net income. Cash outflows occur when operational assets are acquired, and cash inflows occur when assets are sold. The resale of assets is normally reported as an investing activity unless it involves the purchase and sale of inventory, in which case it is reported as an operating activity.

There are two different methods that can be used to report the cash flows of operating activities: For items that normally appear on the income statement, cash flows from operating activities display the net amount of cash that was received or disbursed during a given period of time. The direct method for calculating this flow involves deducting from cash sales only those operating expenses that consumed cash. In this method, each item on an income statement is converted directly to a cash basis, and each cash effect is directly reported.

To employ this direct method, use the following equation:.

Creating Financial Statements: How to Prepare a Cash Flow Statement

Once the cash inflows and outflows from operating activities are calculated, they are added together in the "Operating Activities" section of the cash flow statement to obtain the net cash flow for a company's operating activities. In the indirect addback method for calculating cash flows, the accrual basis net income is established first. This net income is then indirectly adjusted for items that affected the reported net income but did not involve cash.

The indirect method adjusts net income rather than adjusting individual items in the income statement for the following phenomena: Boundless vets and curates high-quality, openly licensed content from around the Internet. This particular resource used the following sources:. Except where noted, content and user contributions on this site are licensed under CC BY-SA 4.

Detailed Review of the Statement of Cash Flows. Read Feedback Version History Usage. There is an indirect and a direct method for calculating cash flows from operating activities.

Learning Objective Explain the direct method for preparing the statement of cash flows. Key Points In order to identify the inflows and outflows for operating activities , you need to analyze the components of the income statement.

Under the direct method , adjustments are made to the " expense accounts " themselves. The direct method of preparing a cash flow statement results in a more easily understood report, as compared with the indirect method. The most common example of an operating expense that does not affect cash is a depreciation expense.

Example The following is an example of using the direct method for calculating cash flows. For example, in order to find out the cash inflow from a customer we need to know the sales revenue , but the sales revenue is also affected by the accounts receivable account.

So, if the sales revenue is , and the accounts receivable increases by 20, then the cash received from customers would be In order to determine the cash paid to suppliers, you need to look at both the inventory and the accounts payable account, and then determine their effect on the cost of goods sold.

Preparation of the Statement of Cash Flows: Direct Method

For example, if the cost of goods sold was , and inventory increased by seven, and the accounts payable decreased by fifteen, the cash paid to suppliers would be You add seven because the inventory increased, and you add fifteen because the accounts payable decreased, which means more money was paid. The cash paid for interest is determined by the bond interest expense and discount on the bonds payable.

For example, if the interest expense is ten dollars, and the unamortized discount decreases by three dollars, then the cash paid for interest is seven dollars.

Cash Flow Statement and Depreciation

Calculating Cash Flows Cash flows refer to inflows and outflows of cash from activities reported on an income statement. Calculating Cash Flows The two methods to calculate cash flows are the direct method and the indirect method. Prev Concept Key Considerations for the Statement of Cash Flows. Preparation of the Statement of Cash Flows: Create Question Referenced in 1 quiz question The direct method only subtracts what items from cash sales?

Key Term Reference Assets Appears in these related concepts: Unsecured Funding , Defining Long-Lived Assets , and Defining the Marketing Objectives. Current Asset Appears in these related concepts: Calculating Working Capital , Controlling the Components of Working Capital , and Reporting Cash.

Interest Appears in these related concepts: Interest Compounded Continuously , Accounting for Interest Earned and Principal at Maturity , and Tax Considerations.

Operating Expense Appears in these related concepts: Income Statement Analyses , Income Statement Formats , and Cost of Goods Sold and Gross Profit. Recording Transactions , Fundamental Accounting Equation , and Closing the Cycle. Types of Receivables , Return on Investment , and Long-Term vs. Introduction to GAAP , Recognition of Revenue at Point of Sale or Delivery , and Recognition of Revenue Prior to Delivery.

Overview of Statement Changes and Errors , Comparability , and Adjustments. Factors Affecting the Price of a Bond , Current Maturities of Long-Term Debt , and Preferred Stock.

Cost of Land , Terminology of Accounting , and What Is Cash? Calculating the NPV , Interpreting the NPV , and Defining the Cash Flow Cycle. Reasons for a Conceptual Framework , Impairment Measurement , and Working Capital Management Analysis.

Reporting Long-Term Liabilities , The Battery , and Magnetic Force Between Two Parallel Conductors. Liabilities , Current Ratio , and The Financial Statements. Reporting Current Liabilities , Redeeming at Maturity , and Current Obligations Expected to Be Refinanced. Reporting Assets , Sale , and Sample Income Statement. Expense Recognition , Break-Even Analysis , and Introduction to the Income Statement. Income , Revenue , and Wealth. Indirect Method , Impact of Depreciation Method , and Special Reporting.

Direct and Indirect Measurement and Flow of Inventory Costs. LIFO Method , Cost of Interest During Construction , and Logistics. Introduction to the Balance Sheet , The Reserve Requirement , and Components of the Balance Sheet.

Role of Finance in an Organization , Differences Between Accrual-Basis and Cash-Basis Accounting , and Basic Components of Asset Valuation. Operating Expenses, Non-Operating Expenses, and Net Income , Uses of the Income Statement , and Elements of the Income Statement. Introduction to the Statement of Cash Flows , Activities of the Business: Financing, Investing, and Operating , and Key Considerations for the Statement of Cash Flows.

What Is a Receivable? Valuing Notes Receivable , Profit Optimization , and Fundamental Concepts in Accounting. Sources Boundless vets and curates high-quality, openly licensed content from around the Internet. This particular resource used the following sources: A Business Perspective, Volume 2: Managerial Accounting by James Don Edwards. Subjects Accounting Algebra Art History Biology Business Calculus Chemistry Communications Economics Finance Management Marketing Microbiology Physics Physiology Political Science Psychology Sociology Statistics U.

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