### Assignments:

Unfinished Assignment Study Questions for Lesson 64

### Lesson Objectives:

- Showing where net income or loss is recorded
- Understanding the concept of accrual accounting
- The three sections of the cash flow statement

The cash flow statement will be the last concept that we discuss in this introductory accounting course. The cash flow statement offers information to both internal and external users about the company's payments and receipts to give insight as to the future income needs.

This financial statement can often be the most complex, so we will break each topic down to minimize the chance for errors when you are preparing cash flow statements on your own.

Using the accrual basis of accounting means that revenues are reported on the income statement when they are earned, even if the cash has not been received yet. Accruals also apply to expenses, as they are reported when they are incurred, not necessarily when the company pays for the expenses.

After the expenses are deducted from the revenues, we are left with the net income figure. It is important to know that accrual accounting is not the same as cash accounting.

Let's start by looking at an income statement and where net loss is recorded.

Above is an example of a consolidated statement of income for the Barrick Gold Corporation.

Let's take note of the net loss figure that will be recorded in the cash flow statement.

The cash flow statement lists the amount of net loss in millions at the top as you can see in the example above.

If you look at the bottom of the cash flow statement, you can see that the cash and equivalents at the beginning of the year was roughly 2.1 billion. The cash at the end of the year was actually higher at 2.4 million. The cash flow statement reflected an increase of \$327 million in cash while there was a net loss of 10 billion.

What is important to know here is that net income does not mean that the cash flow is going up. This always applies in the reverse as the net loss doesn't necessarily mean the cash is going down. As you can in see in this example, there was a net loss and the amount of cash increased.

The reason net income is not directly correlated with cash flow increasing or decreasing is because it is based on accrual accounting, meaning it compounds over the given time period.

In order to use the indirect approach to create the cash flow statement, we must start with the net income or net loss figure from the income statement. We then adjust it based on the accrual journal entries to come up with the cash basis section of net income.

The company ultimately wants to know how much cash has changed for the year when looking at the operating activities section of the cash flow statement. This section is one of three parts of the business activities sections including operating, investing and financing activities.

The investing and financing sections will remain the same whether the indirect or direct method is used. The only section that changes based on the indirect approach is the operating section that shows all of the cash flow items for operations.

In order to prepare this section, we will be learning how to convert the net income figure into a cash basis figure in the next several lessons.