Hi all, I do not possess a background in accounting so am finding FSA portion kinda tough for me. For the calculations of cash flow from indirect method, may I seek some explanations as to why : 1. Why are depreciation expenses, deferred taxes sources of cash inflows? 2. Why sale of machinery is a use of cash, ie. cash outflow? 3. Also, is inventory a cash inflow or outflow? *Assuming all the above are in increased net change* Thanks for yor help in advance, have a great week ahead.
You start from the net income. 1.Net Income was calculated by reducind the portion of depreciation for the year. But that depreciation did Not create a cash outflow.So depreciation reduces the income without creating in the same time a cash flow.You don’t pay to anybody depreciation expenses, it’s just an accounting method.that’s why you have to add back the amt of depreciation 2. Deffered Taxes. you calculate those and they reduce your net income. But since they increase that means that you postpone paying a portion of it.So it does create a less outflow than what is reduced in accounting statements, therefore the difference you add back 3. If inventory increases, that means that you have paid for the goods you sold plus you paid for some more that you did not sell and that increase your inventory. So although you expensed a portion of their costs, the payment (outlow) was bigger.So you reduce the difference 4.For the Sale of machinery you have to know That the whole amt appears as an inflow in the cash flow from investing. That means that you calculated it once as profit incorporated in net income as the difference between sale price and book value and the second time you have the whole price incorporated in the cash flow from investing. that means that you double recorded the profit from that sale.that means that you deduct the amt of profit you made from net income and you add the whole price amt in the cash flow from investing I am sorry if I was to complicated but it’s too early for me
The cash flows you mentioned are not actual cash flows but are actually adjustments to net income to derive cash flow. Net income is based on a number of accounting assumptions, not actual cash flow, and the statement of cash flows shows the adjustments to reconcile to cash transactions.