Question

1) Please list and discuss some of the adjustments that must be made to convert Net Income to Net Cash from Operating activities.

2) Which do you consider to be the most important section of the statement of cash flows and why ?

3)  What are some of the purposes of the statement of cash flows and how does it help users?

4) Let's say a company buys a piece of equipment by signing a note payable. Which section of the statement of cash flows will this fit into?

Answer 1

1. First of all, non cash items like depriciation and ammortization which are deducted at the time of calculating net income should be added back to net income to arrive at net cash flow from operating activity. Increase in current assets should be decucted, increase in current liabilities should be added , decrease in current assets should also be added and decrease in current liabilities should be deducted. Provision for Income tax should be added to net income to arrive at net cash flow from operating activity.

2. All three activities of cash flow statement are important as they indicates different things to the management. However if have to pick one , then I would say that operating activity is the most important because it gives a clear picture to the management of the day to day or routine cah in flows and out flows of the business.

3. The purpose of cash flow statement is to analyze the long term solvency as well as the liquidity of the enterprise.It indicates the areas from where cash comes into the business and also the areas where the cash is spent. It identifies the primary cash flows of the organization during a specific period of time.

4. If the company buys a equipment by signing a note payable then it will affect both the investing activity as well as the operating activity of the business. Purchase of equiment (fixed asset purchase) will be recorded under investment activity and on the other hand the note payable amount will be added in net income to arrive at the net cash flow from operating activity since it amounts to change in working capital.