Cash Flows from Operating Activities

Gains or losses resulting from selling long-term assets, investments, or retiring bonds. They are initially included in net income but must be removed for accurate cash flow analysis.

The increase in an asset's value when sold, above its original cost. It increases net income on the income statement but must be subtracted when calculating cash flows.

The decrease in an asset's value when sold, below its original cost. It decreases net income on the income statement but must be added when calculating cash flows.

Increases in current assets (excluding cash) like accounts receivable, inventory, or prepaid expenses reduce the net income on the cash flow statement. Think of it as money earned but not yet in your pocket.

Decreases in current liabilities like accounts payable or accrued expenses decrease the net income on the cash flow statement. Think of it as money owed that you paid off.

The amount of money a company has received from its customers through sales, which can be greater than the amount recorded as revenue on the income statement.

The cost of goods sold, or the cost of creating the products or services a company sells, is reflected in the balance of merchandise inventory.

The statement of cash flows operating activities section starts with net income when using the indirect method because it reflects accrual-based accounting. The cash flows from operations don't always match the accrual-based revenues and expenses.

Sales on account increase net income, but the company hasn't collected the cash yet. These sales are recorded as revenue, but the cash hasn't come in.

Accrued expenses decrease net income but the company hasn't paid for them yet, meaning no cash has gone out yet. It's a liability to be paid in the future.

Adjustments to net income are made on the statement of cash flows to reconcile net income to net cash flow from operating activities. These adjustments add or subtract items that affect net income but not cash flow.

Depreciation, depletion, and amortization expenses are added back to net income to reconcile net income to net cash flow from operating activities because they are non-cash expenses.

Depreciation is a non-cash expense that is recorded on the income statement, but doesn't involve an actual cash outflow. The cash outflow occurred when the asset was purchased.

Depreciation, depletion, and amortization expenses are all non-cash expenses. They represent the gradual decline in value of assets due to wear and tear or use.

To reconcile net income to net cash flow from operations, depreciation of $20,000 must be added back to net income because it is a non-cash expense. It is added back to the net income to get the net cash flow from operations. It's added back since the expense was recorded on the income statement but didn't involve an actual cash outflow.