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Illustrations—Tax Consultants Inc. Year 3

Illustrations—Tax Consultants Inc. Year 3

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Illustrations—Tax Consultants Inc.

Year 3 – Statement of Cash Flows



Statement of Cash Flows—2021



LO 2



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Sources of Information for the Statement of Cash

Flows

1. Comparative balance sheets.

2. An analysis of the Retained Earnings account.

3. Includes all changes that have passed through cash or

have resulted in an increase or decrease in cash.

4. Write-downs, amortization charges, and similar “book”

entries, such as depreciation, because they have no

effect on cash.



LO 2



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Indirect Method—Additional Adjustments

Adjustments Needed to Determine Net Cash Flow from

Operating Activities.



LO 2



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Learning Objective 3

Contrast the Direct and Indirect

Methods of Calculating Net Cash Flow

from Operating Activities



LO 3



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Net Cash Flow from Operating Activities—Direct Method



Companies adjust each item in the income statement

from the accrual basis to the cash basis.



LO 3



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Net Cash Flow from Operating Activities—Direct Method

Formulas



LO 3



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Net Cash Flow from Operating Activities—Direct

Method

Operating Activities Section



LO 3



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Net Cash Flow from Operating Activities—Direct Method

Special Rules – Receipts



Special Rules Applying to Direct and Indirect Methods

Companies that use the direct method are required, at a

minimum, to report separately:

Receipts

1. Cash collected from customers (including lessees,

licensees, etc.).

2. Interest and dividends received.

3. Other operating cash receipts, if any.

LO 3



Copyright ©2019 John Wiley & Sons, Inc.



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Net Cash Flow from Operating Activities—Direct Method

Special Rules – Payments



Special Rules Applying to Direct and Indirect Methods

Companies that use the direct method are required, at a

minimum, to report separately:

Payments

1. Cash paid to employees and suppliers of goods or services

(including suppliers of insurance, advertising, etc.).

2. Interest paid.

3. Income taxes paid.

4.LO 3Other operating cash

payments, if any.

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Learning Objective 4

Discuss Special Problems in Preparing a

Statement of Cash Flows



LO 4



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Special Problems in Statement

Preparation

Adjustments to Net Income

Depreciation and Amortization

• Amortization of limited-life intangible assets.

• Amortization of bond discount or premium.

Postretirement Benefit Costs

• Company must adjust net income by the difference

between cash paid and the expense reported.



LO 4



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