In order to arrive at the amount of net cash provided by operating activities, adjustments need to be

made to net income for the changes in related balance sheet accounts. Generally, an increase in a
liability account will be added to net income and any increase in an asset account will be subtracted.
The purchase of a 3 month U. S. Treasury bill involves exchanging cash for a cash equivalent. As a
result, cash decreases but cash equivalents increase. There is no change in the amount of cash and
cash equivalents as a result of the transaction and it is not reported on the statement of cash flows.
Financing activities: Dividends paid, bank debt, issuance of common stock. retire bonds, proceeds
from the sale or reacquire of treasury stock, Proceeds from the issuance of common stock,
borrowings under a line of credit, and proceeds from the issuance of convertible bonds are cash
inflows, loan principle payment. Principal payments on debt, such as payments to retire mortgage
notes, are outflows from financing activities. Payments of dividends are also outflows from financing
activities.
Noncash: The conversion of preferred stock into common stock is a noncash activity,

The signing of the lease resulted in the recognition of an asset and a liability equal to the present
value of the lease payments. This is a noncash activity and is not reflected in the statement of cash
flows. As payments are made on the lease obligation, the portion allocated to interest will be
reported as a cash outflow from operating activities, while the portion allocated to principal will be
reported as a cash outflow from financing activities.
Operating activities: An increase in the investment carried under the equity method indicates that the
amount included in income was greater than the amount received. A decrease in the premium on
bonds payable is due to amortization. An increase in deferred income taxes payable. Interest
payments are outflows from operating activities.
Investing activities: The decrease in accumulated depreciation caused by a major repair to projection
equipment is an outflow for investing activities. The proceeds from the sale of equipment.The
purchase of A.S. bonds. Investment in common stock of a company. cash proceeds from the sale of
the HTM investment, the acquisition of the AFS investment

The sale of equipment with a carrying value of $500,000 for $400,000 in cash will result in the
recognition of a loss on sale of $100,000, which reduces net income but does not represent an
outflow of cash. As a result, it is ignored under the direct method and added back to net income
under the indirect method. The $400,000 proceeds from the sale of the equipment is an inflow from
investing activities.
Dividends received are reported under operating activities for GAAP (investing activities for IFRS
unless lending is a normal business activity). Financing activities would include areas such as the
issuance of stock and bonds or paying dividends to shareholders.

Using the indirect method in the preparation of the statement of cash flows, net income is adjusted
by the non-cash items of income and expense, non-operating items, and for the changes in the
balances of accrual related balance sheet accounts. To reconcile cash provided from operating
activities back to net income, it is necessary to subtract the non-cash expense items (depreciation
and amortization of goodwill) to arrive at the net income. There is not an adjustment for the
dividends paid on common stock because dividends are not expenses and reported under financing
activities on the statement of cash flows. The issuance of common stock is also a financing activity.
An increase in the allowance for doubtful accounts results from the recognition of bad debts
expense, which reduced income without requiring the use of cash. It will be added to income.
(Allowance account is treated as a liability account)
Prepaid insurance expense is an asset.
In a statement of cash flows, the proceeds from the sale of equipment is reported as a cash inflow
from investing activities. The proceeds will equal the carrying value of the equipment plus any gain
or minus any loss realized on the sale.
The cash effects of transactions involving the acquisition and disposing of property, plant, and
equipment are reported under the investing activity section of the statement of cash flows.
the cash effects of transactions that enter into the determination of net income are presented in the
operating activities section of the statement of cash flows.
An increase in prepaid insurance indicates that the amount paid was greater than the amount
charged as expense.
Under IFRS, an entity may report payments for interest as either a cash outflow for operating
activities or for financing activities.
The decrease in the unamortized bond discount balance represents interest expense incurred in the
current period that wasnt a result of a cash disbursement; and is therefore added to net income.
A sale of equipment and a purchase of equipment are treated as separate transactions on a
statement of cash flows and are not netted against one another. The sale of equipment represents a
cash inflow from investing activities equal to the amount received in the transaction. A purchase of
equipment represents a cash outflow from investing activities equal to the amount paid.
Investing activities include purchases and sales of property, plant, and equipment; purchases and
sales of investments, other than trading securities; and loans made to others along with principal
collections on those loans.
Using the indirect method of preparing a statement of cash flows, net income is adjusted for changes
in balance sheet accounts which do not affect cash such as the bad debt allowance account. Thus,
the increase in the bad debt allowance (a contra-asset account) represents an estimated expense
(using the accrual accounting method) incurred in the current period that was not a result of a cash

disbursement and is added back to net income in the operating activities section of the statement of
cash flows to calculate cash flows from operating activities.
A bond issuer recognizes amortization of bond discount as an increase in bond interest that does not
require the use of cash, while a bond investor recognizes it as an increase in interest income that is
not an inflow of cash. It is added back to the net income of an issuer and deducted from the income
of an investor in determining cash flows from operating activities. Amortization of bond discount
increases interest expense and reduces net income without requiring a cash outflow. It is added
back to income in determining cash flows from operating activities.
Interest and dividends received are reported under GAAP within the operating activities section of
the statement of cash flows, under International Financial Reporting Standards (IFRS), interest and
dividends received are reported within the investing activities section of the statement of cash flows,
unless lending is a normal business activity of the corporation, which is not the case.
decrease in prepaid interest is an addition to interest expense because some of the interest paid in
the previous year applies to, and is recognized as expense in, the current period.
Financing activities include items such as issuing or retiring bonds (interest however is under
operating activities using GAAP), issuing or repurchasing treasury stock, borrowing or repaying
loans, and dividends paid to shareholders (dividends received under GAAP are reported under
operating activities).
A decrease in the unamortized bond discount decreases interest paid