Cash Flows from Investing Activities: Reports cash transactions related to the acquisition or disposal of long-term assets, such as property, plant, and equipment, or investments in other companies.Cash Flows from Operating Activities: Starts with net income and adjusts for non-cash items and changes in working capital to arrive at the net cash flow from operating activities.The structure of a cash flow statement prepared using the indirect method typically includes the following sections: This method highlights the differences between net income, a company’s accrual-based profitability, and actual cash flow from operations. In the indirect method, the cash flow from operating activities is calculated by adjusting net income for non-cash items, such as depreciation and amortization, and changes in working capital (i.e., changes in current assets and current liabilities). The indirect method is more commonly used than the direct method, primarily because it is simpler to prepare and relies on data readily available from the income statement and balance sheet. To reconcile net income to cash flow, companies subtract non-expense cash payments from net income.The cash flow statement indirect method is an approach to preparing the statement of cash flows, which is one of the main financial statements of a company. When net income does not take into account such cash payments, it overstates the actual cash flow prior to adjustments. These cash expenditures are not recorded as expenses, but used to increase the assets of inventory and prepaid expenses and decrease the liability of accounts payable. Companies may purchase inventory with cash, make prepayments for future expenses or pay off accounts payable when due. Certain cash transactions from operating activities are not expense related and thus, not deducted from net income. Subtract non-expense-related cash payments. To reconcile net income to cash flow, companies add to net income the amount of increase in unearned revenues. When net income does not account for such cash receipts, it understates the actual cash flow prior to adjustments. Instead, companies record customer prepayments as unearned revenue under liability. For example, companies receive cash when customers prepay for future delivery of goods or services, but do not record the payments as revenue. Certain cash transactions from operating activities are not revenue related and thus, not included in net income. Include non-revenue-related cash receipts. To avoid double counting, non-operating revenues are deducted from net income. For example, gains on sale of investments are reported as investing cash flow. However, cash flow of non-operating revenues should be reported in a non-operating section of a cash flow statement. Net income may also include non-operating revenue such as gains on sale of investments. To convert net income to cash flow, companies deduct any increase in accounts receivable from net income. If net income includes non-cash revenues, it overstates the actual cash flow prior to adjustments. Companies may report credit sales as non-cash revenues in accounts receivable. Deduct non-cash and non-operating revenues.
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