Question

Using an indirect method statement of cash flows from a publicly traded company, discuss an item that was recorded when calculating net income, but is adjusted as an increase or decrease to determine cash provided by (used 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 there is an adjustment necessary to determine cash from operations.

Answer 1

--Net income is adjusted by adding non cash expense items included in Income Statement. The losses and gains on sale of fixed asset/investment is also adjusted. Also, changes in current asset and current liabilities are also adjusted.

No.	Conceptual Notes
1	Cash Flow Statement reflects the Cash Inflows and Outflows during a period of time.
2	Effects of Non - Cash Transaction are adjusted from Net Income.
3	Depreciation Expense, Amortisation expenses are Added back to Net Income in Cash Flow Statement.
4	Decrease in Current Assets OR Increase in Current Liabilities are ADDED to Net Income
5	Increase in Current Assets OR Decrease in Current Liabilities are DEDUCTED from Net Income

--One item 'as asked' in the requirement considered here is "LOSS ON SALE OF EQUIPMENT".
>Loss on sale of equipment is ADDED back to net income under Operating activities.
>This is because such LOSS has effect of decreasing the net income calculated in income statement.
>Moreover, loss/gain on sale is an item of investing activities, hence its effects should be neutralized from operating activities. Thats why it is added back.