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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 Add depreciation expense. 2 1.Enter net income.
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CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 18-2LESSON 18-2
Preparing the Operating Activities Section of a Statement of Cash Flows
CENTURY 21 ACCOUNTING © Thomson/South-Western
PREPARING THE STATEMENT OF PREPARING THE STATEMENT OF CASH FLOWSCASH 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
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LESSON 18-2
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTING FOR DEPRECIATION ADJUSTING FOR DEPRECIATION EXPENSEEXPENSE
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.
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LESSON 18-2
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2. Add depreciation expense.
22 1. Enter net income.
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTMENT FOR INCREASES IN ADJUSTMENT FOR INCREASES IN CURRENT ASSETSCURRENT 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
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LESSON 18-2
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTMENT FOR INCREASES IN ADJUSTMENT FOR INCREASES IN CURRENT ASSETSCURRENT 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
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LESSON 18-2
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1. An increase in Accounts Receivable is a use of cash and is a decrease in net income
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTMENT FOR DECREASES IN ADJUSTMENT FOR DECREASES IN CURRENT ASSETSCURRENT 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
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LESSON 18-2
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTMENT FOR DECREASES IN ADJUSTMENT FOR DECREASES IN CURRENT ASSETSCURRENT 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.
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LESSON 18-2
CENTURY 21 ACCOUNTING © Thomson/South-Western
ADJUSTMENT FOR CHANGES IN ADJUSTMENT FOR CHANGES IN CURRENT LIABILITIESCURRENT 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 incomeDecreases in current liabilities represent uses of
cash and are deducted from net income
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LESSON 18-2
CENTURY 21 ACCOUNTING © Thomson/South-Western
SUMMARY OF ADJUSTMENTS TO SUMMARY OF ADJUSTMENTS TO NET INCOMENET 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
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LESSON 18-2
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 REPORTING CASH FLOWS FROM OPERATING ACTIVITIESOPERATING ACTIVITIES
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