Key Terms
Three uses of the statement
1. Show actual cash movement alongside accrual-based net income 2.
Example
Purchasing land worth $20,000 by signing a note payable. No cash changed hands; both an investing activity (land acquire
Starting point
Net income from the income statement.
Then adjust for three categories
1. Add back noncash expenses 2.
Noncash expense
Reduces net income but requires no cash outflow; depreciation is the primary example
Adjustment
Add depreciation (and any other noncash expense)
Accounts receivable increased
Revenue was recognized but not yet collected. Net income is higher than cash collected.
Accounts receivable decreased
Cash was collected on prior-period revenue. More cash came in than revenue recognized this period.
Inventory increased
Cash was spent to build inventory that has not yet become COGS. Subtract the increase.
Prepaid insurance increased
Cash was paid for future coverage. Not yet an expense; cash already left.
Accounts payable increased
Expenses were recorded but not yet paid in cash. Net income was reduced more than cash actually went out.
Salaries payable increased
Salary expense was accrued but not yet paid. Same logic as accounts payable.
Accounts payable decreased
More cash was paid than the period's expense. Subtract the decrease.
Calculating proceeds when not given directly
Cash proceeds = net book value of asset + gain (or - loss) Example: Book value $10,000 + gain $4,800 = cash received $14
Statement of cash flows
Financial statement listing cash inflows and outflows for a period