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Nikolas Nikolas
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You are on a team responsible for addressing cash flow problems with other managers in your corporate division. Your accounting department has provided the statement of cash flows prepared using the indirect method. At your first meeting, some of the managers have expressed concerns about the statement's understandability and do not view the statement as anything other than a "rearranged income statement". The managers have requested that your team explain to them how the statement is constructed.

Required:

a.Explain to your managers why the indirect method is a useful approach to reporting
cash flows from operating activities.
b.Explain to your managers why increases in current assets are subtracted from net
income and increases in current liabilities are added to net income to calculate the cash flow provided by operating activities.
c.Explain to your managers any differences between the indirect method and the direct
method of preparing the investing and financing sections of the statement of cash flows.
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Managerial Accounting

Managerial Accounting


Edition: 4th
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wardasidwardasid
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More solutions for this book are available here
a.The indirect method, which starts with net income and converts it to cash flows
provided by operating activities, appeals to users of financial statements who want to know why cash differs from net income.

b.Increases in current assets are subtracted from net income because of how the change
impact cash. For example, accounts receivable increases by the amount of sales and decreases by cash collections. If the accounts receivable ending balance is greater than the beginning balance, then the amount collected must have been less than the amount of sales included in net income. To convert from sales to collection, we must reduce net income by the increase in accounts receivable. Using the same logic, we adjust net income for changes in each current asset balance.
For current liabilities, the opposite is true. Consider accrued liabilities, which increases when operating expenses are incurred and decreases when operating expenses are paid. If the ending balance in accrued liabilities is greater than the beginning balance, then the amount of cash paid was less than the amount of operating expense included on the income statement. To convert from operating expenses to cash payments for operating expenses, then, we must increase net income by the increase in accrued liabilities.

c.There is no difference between the direct method and the indirect method in preparing
the investing or financing sections of the statement of cash flows.

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Nikolas Author
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A month ago
Thank you, thank you, thank you!
ediblefruitz
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Yesterday
Thanks
aricketts6@
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2 hours ago
Smart ... Thanks!
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