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.
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 ...