Page 61 - CFA Lecture Day 8 Slides

LOS 26.g: Convert cash flows from the Session Unit 7:
indirect to direct method. p. 115 26. Understanding Cash Flow Statements

Cash collections from customers, p.116:
1. Begin with net sales from the income statement.

2. -(+) any increase (decrease) in the accounts receivable balance as reported in the indirect method.
3. + (-) an increase (decrease) in unearned revenue.

Cash payments to suppliers:

1. Begin with cost of goods sold (COGS) as reported in the income statement.
tanties
2. If depreciation and/or amortization have been included in COGS (they increase COGS), these noncash
expenses must be added back.

3. Reduce (increase) COGS by any + (-) in the accounts payable reported in the indirect method. If
payables increased, then more was spent on credit purchases than was paid on existing payables, so
cash payments are reduced by the amount of the increase in payables.
4. + (-) any increase (decrease) in the inventory as disclosed in the indirect method. Increases in

inventory are not included in COGS but still represent the purchase of inputs, so they increase cash
paid to suppliers.
5. Subtract an inventory write-off that occurred during the period. An inventory write-off, as a result of
applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the

period. However, no cash flow is associated with the write-off.