week 7- cash flow- indirect method

week 7- cash flow- indirect method - Cash flow statements...

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Cash flow statements Accrual based accounting: - Revenue is recognised when earned i.e. provided - Expenses are recognised when incurred i.e. when assets are consumed or liabilities incurred - Over or understatement of assets, liabilities, revenue and expenses accounts adjusting entries with affects on income stated Cash based accounting: - Revenue is recorded only when cash is received - Expenses are recorded only when cash is paid Indirect method: stars with profit and converts/reconciles it to net cash provided (used) by operating activities. Reconciliation: - Net profit must be reconciled to net cash provided by operations - Indirect method is used for this: Net profit is adjusted for accrual accounts Result should equal net cash provided and/or used by operations Adjustment required: - Non-cash items e.g. depreciation - Timing differences e.g. changes to accounts receivables - Cash flow activities that are not classified as operating cash flows e.g. revenue rece sale of land 1
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Cash flow statements RECONCILIATION STEPS - Start with net profit - Calculate changes to current asset accounts * add decreases * subtract increases - Calculate changes to current liability accounts * add i ncreases * subtract decreases - Add non-cash expense items - Subtract non-cash revenue items ± = Net profit adjustments net cash provided or used by operating activities Adjustments to convert profit to net
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week 7- cash flow- indirect method - Cash flow statements...

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