[Anonymous]

I’m REALLY struggling on cash flows. None of my professors in college hit hard on this topic and I can’t seem to keep any of it straight. Do any of you have any quick study tips or tricks that can help me?

[pacific1]

This is something that helped me with the indirect method…

In regards to mastering the indirect statement of cash flows, I always thought about how the change in a balance sheet account would affect cash flow. Since the indirect method starts with net income, think of each balance sheet account change (increase or decrease) and the corresponding effect to net income. So for instance, if we know that A/R increased from $5,000 to $10,000 then that's $5,000 in revenue reflected in net income that was not received in cash, so we need to back it out from our starting net income on the statement of cash flows.

Same deal for prepaid expenses, if we know our prepaid expenses increased, then that's cash that we paid out even though we didn't recognize the expense (i.e. not reflected in net income). So we have to reduce the starting net income amount by the amount of the increase in prepaid expenses since that's cash we spent not reflected on the income statement.

On the liability side, let's take accrued salaries as an example. If accrued salaries increases then what does that mean in relation to net income? It means we recognized an expense but we didn't pay out the cash. So the increase in the accrued salaries account on the balance sheet has to be added onto the statement of cash flows (i.e. added to net income since the expense was on the income statement but the cash has not been paid).

Try to think through each balance sheet account logically and how the change in the account would effect cash flows as they relate to what's already reflected on the income statement. The general rule is that increases in asset accounts will be subtracted from net income on the statement of cash flows (and vice versa). Increases in liability accounts are added to the statement of cash flows (and vice versa).

[mavsbustin3s]

@eelcpa, here is an outline of the direct method. The important thing to remember with the direct method is if we are adding an item to cash, we must add cash inflows and subtract cash outflows, and if we are subtracting an item from cash, we must add cash outflows and subtract cash inflows (subtracting twice = addition). Hope this helps.

Direct method

Breaks down each cash flow into separate categories, we add cash inflows and subtract cash outflows

-cash received from customers (add)

* Because we are adding this to cash, we must subtract cash outflows and add cash inflows

*start with total revenue, add decreases in AR (cash increases, no revenue effect) subtract increases in AR (revenue increases, no cash effect) add increases in unearned revenue (cash increases, no revenue effect) subtract decreases in unearned revenue (revenue increases, no cash effect)

-cash paid to suppliers (subtract)

*Because we are subtracting this from cash, we must add cash outflows and subtract cash inflows

*Start with COGS, add increases in inventory (cash outflow, no revenue effect) subtract decreases in inventory (cash inflow now, no expense effect) subtract increases in AP (expense increase, no cash effect) add decreases in AP (cash outflow, no expense effect)

-cash paid to employees (subtract)

* Because we are subtracting this from cash, we must add cash outflows and subtract cash inflows

*Start with salaries expense, add back increase in salaries payable (expense now, no cash effect) subtract decrease in salaries payable (cash outflow, no expense effect)

-interest received (add)

-interest paid (subtract)

-dividends received (add)

-income taxes paid (subtract)

-insurance proceeds received (add)

-other cash items paid (subtract)

= change in cash

BEC - 85
REG - 77
AUD - 73, 83
FAR - 68, 89

[Anonymous]

@pacific and mavs, Great notes! I'm putting them to use right now and I think I'm scoring a little better just need more practice so that I can do these problems with ease. Thank you both so much! 🙂

[Anonymous]

Just pretend that you have a loan “payable” cuz you received money. Or a liability.

And pretend you have a loan “receivable” cuz you gave money to someone. Or an asset.

That theory might help you some.

[See Pee A]

Try and understand how each account moving and it's effect on the entity's cash position. But, if you want the quick and dirty…

– increase in asset

+ decrease in asset

+ increase in liability

– decrease in liability

1) – increase in asset: If an asset account increases, you paid for it somehow, so cash goes “down”.

2) + decrease in asset: If an asset decreases, you sold or used it, so cash goes “up”.

3) + increase in liability: if you incur an expense but don't pay for it now, you “save” cash, so cash goes “up”.

4) – decrease in liability: If a liability decreases, then you paid it, so cash goes “down”.

Quick and dirty. I personally would memorize this and keep going through practice problems. Eventually, it will make sense whether cash is going “up/down” when an asset/liability account increases/decreases. Seems simple, but memorizing will trick you on exam day. Start with the shortcut, and really try and understand it. This way, it's one less thing to memorize and more room for something else 🙂

BEC 86 (08/30/11)
FAR 84 (10/13/11)
REG 88 (11/08/11)
AUD 86 (11/29/11)

Exam prep - Becker self-study

[Author]

Replies