In the second line of the statement of cash flows

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in the second line of the statement of cash flows merely zeros out (undoes) the depreciation expense that was subtracted when Apple computed GAAP net income. Likewise, the next line (Stock-based compensation expense of $879) uses the same concept. When a company sells goods on credit, it records revenue because it is earned, even though cash is not yet received. When Apple sold $2,142 of goods on credit, its revenues and net income increased by that amount, but no cash was received. Apple's cash profit is, thus, $2,142 less than net income. The $2,142 is subtracted from net income in computing net cash inflows from operations. When Apple purchases inventories, the purchase cost is reported on its balance sheet as a current asset. When inventories are sold, their cost is removed from the balance sheet and transferred to the income statement as an expense called cost of goods sold. If some inventories acquired are not yet sold, their cost is not yet reported in cost of goods sold and net income. The subtraction of $596 relates to the increase in inventories; it reflects the fact that cost of goods sold does not include all of the cash that was spent on inventories. That is, $596 cash was spent that is not yet reflected in cost of goods sold. Thus, the $596 is deducted from net income to compute cash profit for the period. Apple purchases much of its inventories on credit. The $6,307 increase in accounts payable reflects inventories that have been purchased, but have not yet been paid for in cash. The add-back of this $6,307 to net income reflects the fact that cash profit is $6,307 higher because $6,307 of accounts payable are not yet paid. - also helpful to use the following decision guide, involving changes in assets, liabilities, and -_'.to understand increases and decreases in cash flows. Cash flow increases from Cash flow decreases from Assets " . Liabilities and equity . Account decreases Account increases Account increases Account decreases - table above applies to all sections of the statement of cash flows. To determine if a change ea h asset and liability account creates a cash inflow or outflow, examine the change and .. the decision rules from the table. For example, in the investing section, cash decreases PPE assets increase. In the financing section, borrowing from a bank increases cash. ometimes the cash flow effect of an item reported in the statement of cash flows does not gzee with the difference in the balance sheet accounts that we observe. This can be due to sev- factors. One common factor is when a company uses its own stock to acquire another entity. is no cash effect from a stock acquisition and, hence, it is not reported in the statement cash flows. Yet, the company does increase its assets and liabilities when it adds the acquired c::t;:qY<my's assets and liabilities to its balance sheet.
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