Cash generated by the regular operations of a business; usually computed as net income plus or minus the effects of other current assets and current liabilities on cash flows, plus noncash expenses deducted in arriving at net income, minus noncash revenues included, less certain gains and plus any losses that are included in the total proceeds received from sale of fixed assets is given below
Step-by-step explanation:
- Cash flows from operating activities show the net amount of cash received or disbursed during a given period for items that normally appear on the income statement. You can calculate these cash flows using either the direct or indirect method.
- The direct method deducts from cash sales only those operating expenses that consumed cash. This method converts each item on the income statement directly to a cash basis.
- Alternatively, the indirect method starts with accrual basis net income and indirectly adjusts net income for items that affected reported net income but did not involve cash.
- The Statement of Financial Accounting Standards No. 95 encourages use of the direct method but permits use of the indirect method.
- Whenever given a choice between the indirect and direct methods in similar situations, accountants choose the indirect method almost exclusively. The American Institute of Certified Public Accountants reports that approximately 98% of all companies choose the indirect method of cash flows.
- The direct method converts each item on the income statement to a cash basis.
- The indirect method adjusts net income (rather than adjusting individual items in the income statement) for (1) changes in current assets (other than cash) and current liabilities, and (2) items that were included in net income but did not affect cash.
- The most common example of an operating expense that does not affect cash is depreciation expense.