We will now apply the three steps to the information provided for Computer Services Company

We will now apply the three steps to the information provided for Computer Services Company

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
We will now apply the three steps to the information provided for Computer Services Company. Step 1: Operating Activities DETERMINE NET CASH PROVIDED/USED BY OPERATING ACTIVITIES BY CONVERTING NET INCOME FROM AN ACCRUAL BASIS TO A CASH BASIS To determine net cash provided by operating activities under the indirect method, companies adjust net income in numerous ways . A useful starting point is to understand why net income must be converted to net cash provided by operating activities. Under generally accepted accounting principles, most companies use the accrual basis of accounting. As you have learned, this basis requires that companies record revenue when earned and record expenses when incurred. Earned revenues may include credit sales for which the
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: company has not yet collected cash. Expenses incurred may include some items that it has not yet paid in cash. Thus, under the accrual basis of accounting, net income is not the same as net cash provided by operating activities. Therefore, under the indirect method , companies must adjust net income to convert certain items to the cash basis. The indirect method (or reconciliation method) starts with net income and converts it to net cash provided by operating activities. Illustration 12-6 lists the three types of adjustments. Three types of adjustments to convert net income to net cash provided by operating activities...
View Full Document

This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 201 taught by Professor - during the Spring '11 term at Montgomery.

Ask a homework question - tutors are online