Question

Navigate to the notes to the financial statements and locate APPLE'S note on their statement of cash flows that was prepared using an indirect method. Discuss an item that was included when calculating net income but is adjusted as an increase or decrease to determine cash provided by (used in/by) operating activities. Specifically an asset, liability, gain, or loss. Include a summary of how that item impacted net income (or net loss) and why an adjustment might be necessary to reconcile net income to net cash flows from operations. In your post, include a screenshot of the statement of cash flows you are analyzing.

Answer 1

Items included when calculating net income but is adjusted as an increase or decrease to determine cash provided by (used in/by) operating activities

1. Depreciation :

On the income statement, depreciation is usually shown as an indirect, operating expense. It is an allowable expense that reduces a company’s gross profit along with other indirect expenses like administrative and marketing costs. Depreciation expenses can be a benefit to a company’s tax bill because it is allowed as an expense deduction and lowers the company’s taxable income

The cash flow statement begins with net income. The net income was arrived at after providing for depreciation. Though depreciation is treated as an expense , no outgoing payment was effected by way parting with liquid cash rather it was adjusted by means of reduction in the value of assets. Since on account of depreciation there was no outflow of cash , it needs has to added back to net income for the purpose of preparation of Cash flow statement.

2. Deffered Tax Benefit (In the example it is a benefit)

A deferred income tax is a liability/asset recorded on a balance sheet resulting from a difference in income recognition between tax laws and the company's accounting methods. For this reason, the company's payable income tax may not equate to the total tax expense reported under the income statement.

The total tax expense for a specific fiscal year may be different than the tax liability owed to the Internal Revenue Service (IRS) as the company is postponing payment based on accounting rule differences.

The tax expense on the accounting profit would be less than the tax expense on taxable profit. Since, tax for the year is paid as per the taxable profit we would be paying a greater amount of tax than is accrued according to the accounting policies.ence, this tax that we paid in “advance” is referred to as deferred tax asset and will be adjusted in later years.Hence, this tax that we paid in “advance” is referred to as deferred tax asset and will be adjusted in later years

Screenshot of Statement of Casf Flow being analyzed.