[pickanicken]

Anyone have any tips on how to wrap your head around the reconciliation of NI to net cash flow from operating activities?

Everything just seems so backwards to me and I am having a hard time understanding when to add or subtract? I think I am getting more confused because sometimes the study questions will ask you to go from NI to net cash flow and sometimes it will ask in reverse. Any help would be appreciated!

REG - 81
BEC - 83
AUD - 86
FAR - 78 (Done!)

[Anonymous]

Are we talkin' direct or indirect method here?

[Anonymous]

Gotta go but a few rules: Indirect You're looking at Beginning and the End of the Year Balances on the balance sheet and figuring out how much they went up or down.

Asset: Opposite Direction
Did the receivables go up from the beginning of the year? UP – so cash goes down, subtract it
Did the receivables go down from the begging of the year? Down – so cash goes up, add it

Liability: Same Direction
Did the payables go down? Yep – then your cash went down, subtract it.
Did the payables go up? Yep – then you cash went up, add it

[leglock]

Essentially you are just reconciling what happened to your cash. Your net income is not cash basis; therefore, it does not reflect exactly what has happened to cash, hence you can't just add net income to beginning cash, to arrive at ending cash. There are many non cash items included in net income such as depreciation expense or gain/loss that are not cash related.

What has been masterfully created is a shortcut method from rote memorization without having to understand the logic which will yield your change in cash. For operating activites, An easy way to remember it is if an account has a natural credit balance, then a decrease in it is a use of cash. For example, accounts payable. If your accounts payable went down, you paid money to decrease it. So, for all natural credit balance accounts, a decrease represents a decrease in cash, an increase represents an increase in cash.
For accounts that have a natural debit balance, i.e accounts receivable, it's the opposite. A decrease in accounts receivable is achieved by receiving cash, so this is an increase in cash. An increase in a/r is then a decrease in cash.

Apply these rules to the accounts you are in doubt about and you will arrive at the correct answer.

So you can use basic algebra to eradicate your confusion.

Net Income Accrual basis (be cognizant of gains/loss, and changes in accum deprec which denote a sale)
plus decrease in natural debit account
minus increase in natural debit account
plus increase in natural credit account
minus decrease in natural credit account
equals cash flow from operating

plug in the numbers you know, and use algebra to solve for what you don't, so whether they ask for net income, or ask for cash flow from operating, you can just use the formula and solve for x

[Anonymous]

[Anonymous]

.Or try it this way, you get your first accounting job, they pay you $50,000. You deposit every paycheck in the bank and make no withdrawals. Then you get a credit card which gives you a year deferral on payments. You charge every expense you have on that credit card: Rent $12,000, Food $5,000, Utilities $1,000.

Now Here's Your Income Statement
Income: $50,000
Expenses:
Rent. -$12,000
Food. -$5,000
Utilities -$1,000
Net Income. $32,000

Now Here's Your Balance Sheet
Assets:
Cash In Bank. 50,000
=
Liabilities
Cr. Card Payable. 18,000
+
Owner's Equity. 32,000

Now it's time to show why you have 50,000 cash in that bank account, even though your net income was only $32K. The reason is that You expensed $18,000 worth of stuff on that income statement, but no cash went out to pay for it, you just booked it as a payable, so you need to put that down as a “source of cash.”

STatement of Cash Flows
Net Income 32,000
Cash Flows from Operating
Source of Cash: Incr. In A/P. 18,000.
Add this up and you arive at your
ending cash on the balance sheet. $50,000

[pickanicken]

Thanks for the help! Both of your explanations have definitely cleared this up for me.

REG - 81
BEC - 83
AUD - 86
FAR - 78 (Done!)

[CarrieM]

The others have so much more masterfully explained this than I ever could and given how I know I just bombed out my test, I hesitate to even suggest anything!! LOL but what the heck.

The whole outflow/inflow thing was messing me up – I have no idea why because intellectually I completely get it. So I had to break it down even simple for myself and came up with this. Here's the rule that seems to work for me, if you didn't actually ‘pay out cash', it's an inflow. For receivables one extra question, I just would ask “did they pay in cash?”, yes? Inflow.

I don't know why, but my fevered brain seemed to attach itself to that little statement and it really helped. Hope it helps you too.

FAR: 5/12/16... and if I don't die from an anxiety attack...
AUD: 7/8/16
REG: 8/25/16
BEC: 11/3/16

[taiyab]

Wow CPA2021 amazing explanation…loved that credit card example of yours!

[CPA_alltheway]

Great explanations this really helps put the SCF into a better perspective.

AUD - NINJA in Training
BEC - NINJA in Training
FAR - 67
REG - NINJA in Training

Can’t stop, won’t stop!!

FAR - 5/28/2016 - 67 Planning for a retake
AUD - 7/2/2016
REG - 8/12/2016
BEC - 9/8/2016

"I can do all things through Christ who strengthens me" Phil 4:13

[Author]

Replies