cash flow from operations
This is an accounting question about reconciling direct-method cash flow from operations to net income.
I have read that generally for a simple noninventory situation the approach would be something like:
Net Income
Plus
Minus Change in Current Assets
Plus Change in Current Liabilities
--> Should equal
My question is about purchasing a long-term asset on account. A
It seems like there's a missing adjustment in the equation, like "Minus assets purchased on account" or something like that.
Example: Say my company just started and so far only has $5K contibuted cash in the bank. I buy a machine for $5K.
If I buy the machine with cash, the result so far should be:
Dr Bank 5000 / Cr Owner 5000
Dr Machine 5000 / Cr Bank 5000
I/S
Net Income: 0
B/S
Cash: 0
Machine: 5000
Accounts Payable: 0
Owner: 5000
C/F
Cash flow from operations: 0
Cash flow from investing: (5000)
Cash flow from financing: 5000
Reconcile
Net Income = 0
Plus depreciation + 0
Minus Change in Current Assets - 0
Plus Change in Current Liabilities + 0
= 0, match
If I buy the machine on account, the result so far should be:
Dr Bank 5000 / Cr Owner 5000
Dr Machine 5000 / Cr Accounts Payable 5000
I/S
Net Income: 0
B/S
Cash: 5000
Machine: 5000
Accounts Payable: 5000
Owner: 5000
C/F
Cash flow from operations: 0
Cash flow from investing: 0
Cash flow from financing: 5000
Reconcile:
Net Income = 0
Plus depreciation + 0
Minus Change in Current Assets - 0
Plus Change in Current Liabilities + (5000)
= (5000), wrong
The bill is for an asset purchase, not an expense. The cash saved from not paying the bill yet isn't in operating activities, it's in financing activities. So my reconcilation to cash from operations is off.
So my question is:
Is there supposed to be an adjustment like "Minus assets purchased on account" in the reconciliation? If so what is the proper wording?
Or do I fundamentally misunderstand something?
Step by step
Solved in 2 steps
I don't understand two things in the answer.
(1) Cash from operations in the purchase-on-account is 0. The reconciliation shows cash from operations (5000). That doesn't seem to be reconciled.
(2) Why would cash from investing be (5000)? No cash was used yet, it's on account.
by Bartleby Expert
