1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18-2 Preparing the Operating Activities Section of a Statement of Cash Flows

2. CENTURY 21 ACCOUNTING © Thomson/South-Western PREPARING THE STATEMENT OF CASH FLOWS An income statement is prepared using the accrual basis of accounting A Cash Flow statement is prepared using the cash basis of accounting The recognition of revenues & expenses occurs at different times This requires adjustments made to net income to recognize the timing differences 2 LESSON 18-2

3. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTING FOR DEPRECIATION EXPENSE Depreciation Expense is recognized on the income statement but it does not involve the outflow of cash Since depreciation expense does not use cash, it is added back to the net income amount. 3 LESSON 18-2 1 2.Add depreciation expense. 2 1.Enter net income.

4. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTMENT FOR INCREASES IN CURRENT ASSETS Increases in current assets involve a decrease in the cash flow An increase in Accounts Receivable indicates that not all of the sales on account reported for a fiscal period were collected. Means that cash received from sales is less than the sales amount reported on the income statement Increases in current assets represent uses of cash and are deducted from net income 4 LESSON 18-2

5. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTMENT FOR INCREASES IN CURRENT ASSETS On November 1, Heritage Corporation’s Accounts Receivable balance was $0.00 On November 15, Heritage Corporation makes its only sale on account, $100,000. On December 15, Heritage receives $80,000 as a partial payment on the account. No other collections occur during the year. The $20,000 increase in accounts receivable represents cash that has not yet been received 5 LESSON 18-2 1 1.An increase in Accounts Receivable is a use of cash and is a decrease in net income

6. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTMENT FOR DECREASES IN CURRENT ASSETS Decreases in current assets involve an increase in the cash flow A decrease in Accounts Receivable indicates that the company collected all the sales on account for the year plus a portion of the Accounts Receivable from the previous year. Decreases in current assets represent sources of cash and are added to net income 6 LESSON 18-2

7. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTMENT FOR DECREASES IN CURRENT ASSETS On January 1, Heritage Corporation’s Accounts Receivable balance was $20,000. On December 31, the balance was $10,000 Sales on account of $130,000 were made during the year Payments on account of $140,000 were received Heritage would have collected all $130,000 of sales on account for the year and $10,000 of the Accounts Receivable from the previous year. 7 LESSON 18-2

8. CENTURY 21 ACCOUNTING © Thomson/South-Western ADJUSTMENT FOR CHANGES IN CURRENT LIABILITIES During the operating activities of a business, increases & decreases in current liabilities occur as debts are added & paid off in the process of generating revenues Example: An increase in Accounts Payable indicates that not all of the purchases on account made during a fiscal period were paid in full. Increases in current liabilities represent sources of cash and are added to net income Decreases in current liabilities represent uses of cash and are deducted from net income 8 LESSON 18-2

9. CENTURY 21 ACCOUNTING © Thomson/South-Western SUMMARY OF ADJUSTMENTS TO NET INCOME Depreciation expense is added back to net income since it is a noncash expense Increases in non cash current assets (assets other than cash) & decreases in current liabilities represent uses of cash and are deducted from net income Decreases in noncash current assets & increases in current liabilities represent sources of cash & are added to net income 9 LESSON 18-2

10. CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 18-2 page 540 1.Enter net income.4.Enter changes in current liabilities. 2.Add depreciation expense. 3.Enter changes in current assets. 5.Calculate cash flow from operating activities. REPORTING CASH FLOWS FROM OPERATING ACTIVITIES 5 1 1 2 2 3 3 4 4