Generally Accepted Accounting Principles and Net Income Essay

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In this video, professor Terry Mullen explains the basic structure of statement of cash flows and how it works. The statement of cash flows shows the uses and sources of cash during a particular period. Usually, we can use the income statement, statement of retained earnings and balance sheet to determine how a company is doing in accrual basis. The statement of cash flows restates these statements based on the flow of cash. First of all, there are three category of the statement of cash flows which consist of cash from operations, investing and financing. In the operations section, it involves current assets and current liabilities. Cash from investing is about long term assets and cash from financing involves in long term liabilities and owners equity.
There are two methods for cash from operations, direct method(fasb) and indirect method. For cash from operations, you start with net income, you use 5 rules to convert net income to cash basis. Rule 1 is to add back depreciation. For example, when you have depreciation expense, it doesn’t involve in cash, in order to convert to cash basis, we have to add back depreciation expense because we previously subtracted depreciation expense. Rule 2 states that current assets are inversely related. As CA goes up, cash decrease, as CA goes down, cash increases. It is best to work on it in T accounts. The 3rd rule states that the current liabilities are directly related. So as CL goes up, cash increases, as CL

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