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Chapter 23: Q8Q (page 1372)

Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows?

Short Answer

Expert verified

Net income contains elements that do not supply or utilize cash; hence it is necessary to convert accrual-based net income to a cash basis.

Step by step solution

01

Meaning of Cash flow Statement

The cash flow statement gives information on changes in a company's Cash Equivalents and Cash throughout an accounting period. This adjustment consolidates the interests in running, finance, and investing.

02

Explaining the reason to convert accrual-based net income to a cash basis

Net income contains things that don't give or use cash; consequently,the accrual-based net wage must be changed over to a cash basis. A rise in accounts receivable would serve as an outline. Revenues detailed on the gathering approach would be higher than those received in actual cash if accounts receivable rose throughout the period. As a result, the net cash flow from operating activities must be included in the accrual basis net income.

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Most popular questions from this chapter

In 2017, Elbert Corporation had net cash provided by operating activities of \(531,000, net cash used by investing activities of \)963,000, and net cash provided by financing activities of \(585,000. At January 1, 2017, the cash balance was \)333,000. Compute December 31, 2017, cash

Differentiate between investing activities, financing activities, and operating activities.

Use the information from BE23-4 for Bloom Corporation. Prepare the cash flows from operating activities section of Bloom’s 2017 statement of cash flows using the indirect method.

Question: Collinsworth Co. reported sales on an accrual basis of \(100,000. If accounts receivable increased \)30,000 and the allowance for doubtful accounts increased \(9,000 after a write-off of \)2,000, compute cash sales.

Identify and explain the major steps involved in preparing the statement of cash flows.
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