ANALYZING THE STATEMENT OF CASH FLOWS: AN APPLICATION

Now that the statement of cash flows has been prepared, we can use it to assess ABC Enterprises' cash management policies. ABC's cash position decreased (from $8,000 to $5,900) during 2012. For the most part, this decrease was caused by investing and operating activities, which required $8,600 and $7,800, respectively. Financing activities, which provided $14,300, almost made up for these cash deficits. While the exact sources and uses of cash in each of these three areas should be examined, the $7,800 cash deficit due to operating activities appears to be the most troublesome and definitely deserves special attention.

Summarizing the Cash Effects of Operating Transactions

ABC's income statement shows that net income for 2012 totaled $3,100. At the same time, the operations that produced net income reduced the cash balance by $7,800. Interestingly, these two measures produced significantly different numbers that are used to evaluate the same (operating) activities.

The statement of cash flows under the indirect method (Figure 14-19) explains the difference between net income and cash provided (used) by operations. Four items appear to be the most important: (1) the $10,900 buildup in net accounts receivable, (2) the $3,000 decrease in accounts payable, (3) the $3,000 decrease in payments in advance, and (4) the depreciation and amortization of the long-lived assets.

The net accounts receivable buildup increased net income but ...

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