Computing net cash flows from operating activities

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Computing net cash flows from operating activities begins with GAAP profit and adjusts it to compute cash profit using the following general approach: L Adjustments for noncash revenues, expenses, gains and losses Adjustments for changes in noncash current assets and current liabilities Add (+) or Subtract (-) from Net-Income .Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ # Add: depreciation expense . . . . . . . . . . . . . + Adjust for changes in current assets Subtract increases in current assets .... Add decreases in current assets . . . . . . + Adjust for changes in current liabilities Add increases in current liabilities . . . . . . + Subtract decreases in current liabilities .. Cash from operating activities. . . . . . . . . . . $ # Typically, net income is first adjusted for noncash expenses such as depreciation, and is then adjusted for changes during the year in current assets and current liabilities to yield cash flow from operating activities, or cashprofit. The depreciation adjustment merely zeros out (undoes the effect of) depreciation expense, a noncash expense, which is deducted in computing net income. The following table provides brief explanations of adjustments for receivables, inventories, and payables and accruals, which are frequent sources of adjustments in this section: Which requires this adjustment to net income to yield cash profit ••• Change in account balance... . Means that ... Increase Sales and net income increase, but cash is not yet received More cash is received than is reported in sales and net income Add decrease in receivables to net income Deduct increase in receivables from net income Receivables Decrease Increase Cash is paid for inventories that are not yet reflected in cost of goods sold Cost of goods sold includes inventory costs that were paid for in a prior period Deduct increase in inventories from net income Add decrease in inventories to net income Inventories Decrease Increase More goods and services are acquired on credit, delaying cash payment More cash is paid than is reflected in cost of goods sold or operating expenses Deduct decrease in payables and accruals from net income Add increase in payables and accruals to net income Payables and accruals Decrease \
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3USINESS INSIGHT Module 2 I Overview of Business Activities and Financial Statements 2-18 Insights into Apple's Statement of Cash Flows following provides insights into the computation of some amounts in the operating section of Apple's statement of h flows in Exhibit 2.8 ($ millions). Slatement amount Explanation of computation eciation, rtization, and 3!:Cfetion $1,027 ease in unts ::ceivable, $(2,142) sein entories, $(596) ~sein unts payable, 307 When buildings and equipment are acquired, their cost is recorded on the balance sheet as assets. Subse- quently, as the assets are used up to generate revenues, a portion of their cost is transferred from the balance sheet to the income statement as an expense, called depreciation. Depreciation expense does not involve the payment of cash (that occurs when the asset is purchased). If we want to compute cash profit, we must add back depreciation expense to zero it out from income. The $1,027
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