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Questions and Answers
What is the starting point when using the indirect method for cash flows from operating activities?
What is the starting point when using the indirect method for cash flows from operating activities?
Which type of income is reconciled to net cash flow from operating activities?
Which type of income is reconciled to net cash flow from operating activities?
Why is depreciation added back to net income in the statement of cash flows?
Why is depreciation added back to net income in the statement of cash flows?
If a company has net income of $40,000 and depreciation of $20,000, what is the net cash flow from operations?
If a company has net income of $40,000 and depreciation of $20,000, what is the net cash flow from operations?
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Which of the following describes accrued expenses in relation to cash flow?
Which of the following describes accrued expenses in relation to cash flow?
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What happens to net cash flow from operations if only non-cash expenses are present?
What happens to net cash flow from operations if only non-cash expenses are present?
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Which adjustments must be made to reconcile net income to net cash flow from operating activities?
Which adjustments must be made to reconcile net income to net cash flow from operating activities?
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Which of the following is NOT included as an adjustment to reconcile net income to net cash?
Which of the following is NOT included as an adjustment to reconcile net income to net cash?
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What adjustment is made to net income on the statement of cash flows regarding gains from non-operating activities?
What adjustment is made to net income on the statement of cash flows regarding gains from non-operating activities?
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How is a loss on the disposal of plant assets treated in the statement of cash flows?
How is a loss on the disposal of plant assets treated in the statement of cash flows?
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What happens to net income when there is an increase in a current asset such as Accounts Receivable?
What happens to net income when there is an increase in a current asset such as Accounts Receivable?
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When current liabilities decrease, what is the effect on net income in the statement of cash flows?
When current liabilities decrease, what is the effect on net income in the statement of cash flows?
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What is the main purpose of adjusting net income for non-operating activities on the statement of cash flows?
What is the main purpose of adjusting net income for non-operating activities on the statement of cash flows?
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What effect does selling equipment at a gain have on ShopMart's net income?
What effect does selling equipment at a gain have on ShopMart's net income?
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Which statement is true regarding the impact of current assets on net income adjustments?
Which statement is true regarding the impact of current assets on net income adjustments?
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How is the cash flows statement affected by the gain on sale of long-term assets?
How is the cash flows statement affected by the gain on sale of long-term assets?
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Study Notes
Cash Flows from Operating Activities
- Net income (or net loss) starts the operating activities section
- Revenues generate cash receipts, expenses require cash payments
- Net income is based on accrual accounting; cash flow (cash basis) may not equal accrual-based figures
- Sales on account increase net income but don't immediately affect cash
- Accrued expenses decrease net income but aren't paid in cash yet
- Depreciation, depletion, and amortization are non-cash expenses; they must be added back to net income to reconcile cash flow
- Depreciation doesn't touch cash; it's recorded when the asset was purchased, not when depreciated
- To convert net income to net cash flow, adjustments to net income are needed
- Cash sale and depreciation expense example: Cash sale of $60,000, depreciation expense of $20,000. Accrual net income is $40,000 ($60,000 - $20,000). Net cash flow is $60,000. To reconcile net income to net cash flow, depreciation is added back to income.
Gains and Losses from Non-operating Activities
- Gains and losses from non-operating activities (disposal of assets, investments, or bond retirement) should be removed from net income on the cash flow statement
- These are part of investing or financing activities, not operating activities
- Example: A gain of $10,000 on the sale of equipment is subtracted from operating cash flows; a loss is added.
- Changes in current assets(accounts receivable, inventory ,prepaid expenses) and current liabilities (accounts payable, accrued liabilities) affect net income, but not cash flow
- Increase in a current asset (other than cash) decreases net income (e.g., accounts receivable, inventory, prepaid expenses); decrease in a current asset increases net income (e.g., decrease in accounts receivable).
- An increase in a current liability decreases net income, while a decrease in a current liability increases net income.
- Cash flow statement adjustments will adjust net income for the change
Evaluating Cash Flows from Operating Activities
- Operating activities section (indirect method) begins with accrual-based net income
- Adjustments are made for non-cash items and changes in current accounts to get to cash net income
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Description
This quiz explores the fundamental concepts of cash flows from operating activities, focusing on net income, cash receipts, and adjustments needed to reconcile accrual-based figures with cash flow. Understand the implications of depreciation and accrued expenses on net cash flow through practical examples. Test your knowledge on how operating activities affect overall financial health!
