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Introduction to financial reporting analysis - McClure B.B.

McClure B.B. Introduction to financial reporting analysis - wiley publishing , 2009. - 596 p.
Download (direct link): introductiontofinancialrepor2009.pdf
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When the cash provided by operations is presented using the direct approach, the income statement accounts are usually described in terms of receipts or payments. For example, “sales” on the accrual basis income statement is usually described as “receipts from customers” when presented on a cash basis.
Exhibit 10-12 on page 373 shows the statement of cash flows for ABC Company, using the indirect approach. To compute cash flows from operations, we start with net income and add back or deduct adjustments necessary to change the income on an accrual basis to income on a cash basis, after eliminating gains or losses that relate to investing or financing activities. Notice on the ABC Company schedule of change from accrual to cash basis income statement (Exhibit 10-10) that the adjustments include noncash flow items on the income statement, changes in balance sheet accounts related to operations, and gains and losses on the income statement related to investing or financing activities.
Statement of Cash Flows 371
EXHIBIT 10-10
ABC COMPANY
Schedule of Change from Accrual Basis to Cash Basis Income Statement
Accrual Add Cash
Basis Adjustments* (Subtract) Basis
Sales $22,000 Decrease in receivables 100 $22,100
Operating expenses 17,500 Depreciation expense (4,500)
Increase in inventories 1,000
Decrease in accounts payable 1,100 15,100
Operating income 4,500 7,000
Gain on sale of land 1,000 This gain is related to
investing activities. (1,000) -0-
Income before tax
expense 5,500 7,000
Tax expense 2,000 Increase in taxes payable (400) 1,600
Net income $ 3,500 $ 5,400
‘Adjustments are for noncash flow items in the income statement, changes in balance sheet accounts related to cash flow from
operations, and the removal of gains and losses on the income statement that are related to investing or financing activities.
The noncash flow items in the income statement are removed from the account. For example, depreciation expense
may be in the cost of goods sold, and this expense would be removed from the cost of goods sold.
Changes in balance sheet accounts related to cash flow from operations are adjusted to the related income statement
account as follows:
Revenue accounts $ XXX
Add decreases in asset accounts and increases in liability accounts + XXX
Deduct increases in asset accounts and decreases in liability accounts - XXX
Cash inflow $ XXX
Expense accounts
Add increases in asset accounts and decreases in liability accounts + XXX
Deduct decreases in asset accounts and increases in liability accounts - XXX
Cash outflow $ XXX
For the indirect approach, follow these directions when adjusting the net income (or
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