36
as the
net cash provided or
used
in
the operating activities when
using accrual
basis. Consequently,
the
net profit
need
to be adjusted to convert
certain
items
to the cash basis.
The
following
steps
should be done
in
applying
the direct
method
(Weygandt
et al, 2007, p.751):
Step 1: Operating Activities
When
using
the
indirect
method
for
preparing the statement of cash flow, the
company
should
determine
the
net
cash
provided/
used
in
operating
activities
by
adjusting
the
net
profit.
To
what
have
been
mentions
earlier,
most
entities
are using accrual basis. To
what
we
have
learned, the
net profit
is
not the same
with
the net cash provided (used)
in
the operating activities when
using accrual
basis of accounting. Thus, it is necessary for company to adjust the net profit to
determine
the
net
cash
provided
(used)
in
the
operating
activities.
The
net
profit can be adjusted in three ways in order to convert certain items to the cash
basis:
Net Profit
add or minus Adjustments
=
Net cash provided/ used in operating activities
Add back non cash expenses, such as depreciation and amortization expense
Deduct gains and add losses that resulted from nvesting and financing activities
investing and financing activities
Analyse changes to non cash current assets and current liability account
Table 2.10: Three types of adjustments to convert net profit to net cash provided (used)
in operating activities
From: Accounting Principles 2007
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