To prepare the Cash Flows From Operations section of the statement of cash flows, you will start with net income and make adjustments to that number.
| Net Income | ||
| Depreciation Expense | This is a non cash item that has reduced NI so it must be added back. | |
| Losses | This is added back because it results from a sale that is not part of operations but reduced NI. | |
| Gains | This is subtracted because it results from a sale that is not part of operations but had increased NI. | |
| Increases in Current Assets | Think about AR. If this increases, it does not affect CASH so it must be eliminated. | |
| Decreases in Current Assets | Think about AR. If this decreases, then CASH increased because we collected the AR. | |
| Increases in Current Liabilities | This about AP. If this increases it does not affect CASH so it must be eliminated. | |
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Decreases in Current Liabilities
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Think about AP. If this decreases, then CASH decreases because we paid the AP. | |
| CASH FLOWS FROM OPERATIONS |
Notice that the additions and subtractions are based upon changes in the accounts, so it is necessary to compare the account balance with prior period balances.
You will need the following data from the company's financial statements to complete the Cash Flows From Operating Activities section of the statement of cash flows:
from the income statement:
| Net income | $49,000 |
| Depreciation expense | $20,000 |
| Gain on sale of investments | $7,000 |
| Loss on sale of plant assets | $5,000 |
from the balance sheet:
You need current assets (except cash) and current liabilities.
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2016 | 2015 | Increase or decrease |
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| Accounts receivable (net) | $17,500 | $19,500 | $2,000 | decrease |
| Inventory | $59,000 | $42,000 | $17,000 | increase |
| Prepaid expenses | $500 | $2,500 | $2,000 | decrease |
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| Accounts payable | $27,000 | $22,500 | $4,500 | increase |
| Accrued liabilities | $1,000 | $1,200 | $200 | decrease |
| Income taxes payable | $1,500 | $2,500 | $1,000 | decrease |
You will use the following process to complete the Cash Flows From Operating Activities section of the statement of cash flows (indirect method):
Note that Lucky 7 does not have depletion or amortization expenses.
| Net income |
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$49,000 |
| Adjustments to reconcile net income: |
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Depreciation expense
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$20,000 |
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Loss on sale
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$5,000 |
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Gain on sale
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($7,000) |
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Add decrease in accounts receivable
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$2,000 |
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Deduct increase in inventory
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($17,000) |
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Add decrease in prepaid expenses
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$2,000 |
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Add increase in accounts payable
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$4,500 |
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Deduct decrease in accrued liabilities
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($200) |
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Deduct decrease in income taxes payable
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($1,000) | $8,300 |
| Net cash flows from operating activities |
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$57,300 |