Reconciliation of the Cash Flow from Operations
🔥 NEW Why do you think it is necessary to do a reconciliation for the cash flow from operations?
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ibrahim, Saudi Arabia
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Reconciliation for Cash Operation
Because there are adjustments for non-cash accounts in net income.
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Anonymous
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Reconciling the Cash Flow from Operations
Cash flow from operating activities aims to identify the movement of the primary revenue-generating activities for the reporting period. That's why, to complete the reconciliation of the operating activities, we must identify the income and expense components of the core operations, and exclude or remove everything else.
In preparing a Cash Flow Statement, the indirect method uses information from the company's income statement and balance sheet to prepare the cash flow statement.
In such indirect method, you have make several adjustments to reach operating cash flow:
- Elimination of expenses classified under the financing or investing categories. For instance, interest expense has to be eliminated and reported under the financing category.
- Elimination of income classified under the financing or investing categories. For instance, interest income would be eliminated and reported under the investing category.
- Elimination of non-cash income and/or expense items. Depreciation and amortization are the most common examples. For instance, depreciation reducing net income is added back.
- Changes in working capital line items. For instance, increases or decreases in accounts receivable, inventory, accounts payable.
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