I am trying to figure out the indirect method of reporting cash from operations on the cash flows statement. According to the CFA1 books it is NI + adjsut for non-cash items + adjust for non-operating items + changes in accruals. question1: why changes in accruals? question2: I have been going through some annual statements and trying to make sense of their cash from operations. I noticed that many of them had an adjustment for changes in net working capital. Why would this be included in the cash from ops? My understanding was that it was part of the free cash flow equation, but not cash from ops. What is correct. I would appreciate any definitive answers about what the proper format for the indirect cash from ops is. Thanks
DMF Wrote: ------------------------------------------------------- > > question1: why changes in accruals? It’s really non-cash current assets and accrued liabilties Your only activity is year one, sales of $100 (no taxes), but you only got paid $75 of it this year, the rest is accts receivable. If you start with your net income of $100, you have to subtract the $25 in AR increase to get to the $25. The adj for changes gets you from the default assumption that all components of net income were cash to the actual cash. > > question2: I have been going through some annual > statements and trying to make sense of their cash > from operations. I noticed that many of them had > an adjustment for changes in net working capital. > Why would this be included in the cash from ops? because the other (non-cash) side of each entry affecting these accts is in net income as noted above > My understanding was that it was part of the free > cash flow equation, but not cash from ops. > Lots of definitions for FCF. basic def is cash from ops minus capex