![]() ![]() In determining the amount of cash paid for other operating expenses, the other operating expenses amount on the income statement is adjusted by the net changes in prepaid expenses and accrued expense liabilities for the accounting period.Determination of the Amount That was Paid for Other Operating Expenses, Interest, and Income Taxes.If the salary and wages payable increase during the year, then salary and wages expense on an accrual basis will be higher than the amount of cash paid for this expense, and vice versa. In the determination of the cash paid to employees, salary and wages expense is adjusted by the net change in salary and wages payable for the year.However, if accounts payable increased during the year, then purchases on an accrual basis will be higher than they would ordinarily be on a cash basis, and vice versa. If all purchases were made in cash, accounts payable will not change and the cash outflows will equal purchases. Once the amount of purchases has been determined, the cash paid to suppliers can be calculated by adjusting purchases for the change in accounts payable. If inventory increased during the period, then purchases during the period exceeded the cost of goods sold and vice versa. In identifying purchases from suppliers, the cost of goods sold is adjusted for the change in inventory during the accounting period.Determination of the Amount that was Paid to Suppliers and Employees.If accounts receivable increase during the period, then the revenue on an accrual basis is higher than cash receipts from customers, and vice versa. Revenue is adjusted by the net change in accounts receivable during the accounting period.Determination of the Amount of Cash Received from Customers.Steps in Preparing Cash Flow from Operating Activities Under the Direct Method Irrespective of the method used to prepare the cash flow from the operating activities section, the cash flow from investing and financing activities are each prepared using one format only. The second and third steps in the preparation of the cash flow statement entail the determination of the total cash flows from investing activities and financing activities. The cash flow from the operations section of the cash flow statement can be prepared using either the direct method or the indirect method. The first step in preparing the cash flow statement involves the determination of the total cash flows from operating activities. ![]()
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