Explanation of the Cash Flow Statement

Modified on: 2017-04-27 15:24:32 -0400


Design Manager generates an accrual based indirect Cash Flow Statement:

The indirect method of producing a Cash Flow Statement uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (loss) into cash flow by using a series of additions and deductions.

Rules

The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and non-operating items.

  • Decrease in noncash current assets are added to net income
  • Increase in noncash current asset are subtracted from net income
  • Increase in current liabilities are added to net income
  • Decrease in current liabilities are subtracted from net income
  • Expenses with no cash outflows are added back to net income
  • Revenues with no cash inflows are subtracted from net income (depreciation expense is the only operating item that has no effect on cash flows in the period)
  • Non-operating losses are added back to net income
  • Non-operating gains are subtracted from net income

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