1. COGS is 2,900. Inventory increased from 600 to 760. Accounts payable increased from 390 to 470. Calculate cash paid to suppliers.
   Solution: Inventory increased by 160, so purchases were more than COGS: 2,900 + 160 = 3,060. AP increased by 80, so not all purchases were paid in cash. Cash paid = 3,060 − 80 = 2,980.
2. Net income is 720. Depreciation is 180. Gain on sale of equipment is 40. AR increased by 90. Inventory decreased by 60. AP decreased by 30. Calculate CFO using indirect method.
   Solution: Add non-cash depreciation, remove investing gain, subtract AR increase, add inventory decrease, subtract AP decrease. CFO = 720 + 180 − 40 − 90 + 60 − 30 = 800.
3. Sales revenue is 5,000 and accounts receivable increased by 120. Calculate cash received from customers.
   Solution: AR increase means part of sales was not collected. Cash received = 5,000 − 120 = 4,880.
4. Opening equipment cost is 1,000, ending equipment cost is 1,250, purchases are 400, opening accumulated depreciation is 420, depreciation expense is 100, ending accumulated depreciation is 470, and loss on sale is 30. Calculate cash received from sale of equipment.
   Solution: Cost sold = 1,000 + 400 − 1,250 = 150. Accumulated depreciation removed = 420 + 100 − 470 = 50. Book value sold = 150 − 50 = 100. Loss is 30, so cash received = 100 − 30 = 70.
5. Common stock increased from 200 to 260, APIC increased from 500 to 620, retained earnings increased from 900 to 1,050, and net income is 310. Calculate cash raised from shares and dividends paid.
   Solution: Share issue cash = common stock increase 60 plus APIC increase 120 = 180. Retained earnings rose by 150, but net income was 310, so dividends paid = 310 − 150 = 160.
6. IFRS CFO is 900 after classifying interest paid of 120 as financing and dividends received of 40 as investing. Convert CFO to US GAAP, ignoring tax.
   Solution: Under US GAAP, interest paid is operating, so subtract 120. Dividends received are operating, so add 40. US GAAP CFO = 900 − 120 + 40 = 820.

Core Map

1. The balance sheet is a photo. It tells you what the company owns and owes at one date. The income statement and cash flow statement are videos. They explain what happened between two balance sheet dates.

2. The cash flow statement specifically explains the change in cash. The skeleton is simple: beginning cash plus operating cash flow plus investing cash flow plus financing cash flow equals ending cash.

3. The income statement uses accrual accounting. That means revenue can be recorded before cash is collected, and expenses can be recorded before cash is paid. So net income is not the same thing as cash.

4. The cash flow statement is where accrual accounting gets cross-examined. If the income statement says the company sold goods, the cash flow statement asks: did customers pay or did receivables just go up?

5. The key bridge account for credit sales is accounts receivable. If revenue is higher than cash collected, accounts receivable rises. That means the company booked sales before collecting all the cash.

6. Tiny numerical: beginning accounts receivable is USD 20, revenue is USD 100, and ending accounts receivable is USD 35. Cash collected is USD 85 because USD 20 + USD 100 - cash collected = USD 35.

7. Deferred revenue is the opposite mood. The customer paid first, but the company has not delivered yet. Cash rises now, and a liability sits on the balance sheet until the company earns the revenue.

8. The basic account roll-forward is your best friend: beginning balance plus additions minus removals equals ending balance. This works for receivables, inventory, payables, depreciation, debt, shares, and retained earnings.

9. Do not memorize cash flow as a giant table first. Think like a shopkeeper. Did cash come in from customers, go out to suppliers, go into equipment, or move between the company and capital providers?

Cash Flow Buckets

1. Operating cash flow is cash from the normal business. Cash from customers, cash paid to suppliers, cash paid to employees, cash paid for interest, and cash paid for taxes usually live here depending on the accounting rules.

2. Investing cash flow is cash used for or received from long-term assets and investments. Buying equipment is investing outflow. Selling equipment is investing inflow.

3. Financing cash flow is cash moving between the company and capital providers. Issuing debt, repaying debt, issuing shares, repurchasing shares, and paying dividends are financing-type ideas.

4. Depreciation creates a classic timing trap. The cash left when the asset was bought, usually in investing cash flow. The depreciation expense hits the income statement slowly later. So depreciation reduces profit but not current-period cash.

5. Interest creates a classification trap. Under U.S. GAAP, interest paid is operating. Under International Financial Reporting Standards, interest paid can be operating or financing.

6. Dividends create another classification trap. Under U.S. GAAP, dividends paid are financing. Under International Financial Reporting Standards, dividends paid can be operating or financing.

Direct Method: Operating Cash Flow

1. The direct method says: show me the actual cash lines. Cash collected from customers, cash paid to suppliers, cash paid to employees, cash paid for other operating costs, cash paid for interest, and cash paid for taxes.

2. Cash collected from customers starts with revenue and adjusts for accounts receivable. If accounts receivable increased, some sales were not collected, so subtract the increase. If accounts receivable decreased, old receivables were collected, so add the decrease.

3. Formula: cash collected from customers equals revenue minus increase in accounts receivable, or revenue plus decrease in accounts receivable.

4. Tiny numerical: revenue is USD 100 and accounts receivable increased by USD 12. Cash collected is USD 88. The company sold USD 100, but USD 12 is still sitting with customers.

5. Tiny numerical: revenue is USD 100 and accounts receivable decreased by USD 8. Cash collected is USD 108. The company collected this year's sales plus some old customer balances.

6. Cash paid to suppliers needs two steps. First find purchases. Then find cash paid. Do not jump directly from cost of goods sold to supplier cash unless inventory and payables did not move.

7. Purchases equal cost of goods sold plus increase in inventory, or cost of goods sold minus decrease in inventory. If inventory grew, the company bought more than it sold.

8. Tiny numerical: cost of goods sold is USD 70 and inventory increased by USD 10. Purchases are USD 80. The company sold USD 70 worth of goods but also added USD 10 more to shelves.

9. Cash paid to suppliers equals purchases minus increase in accounts payable, or purchases plus decrease in accounts payable. If payables increased, suppliers financed part of the purchases.

10. Tiny numerical: purchases are USD 80 and accounts payable increased by USD 15. Cash paid to suppliers is USD 65. The company bought USD 80 but still owes USD 15.

11. Tiny numerical: purchases are USD 80 and accounts payable decreased by USD 5. Cash paid to suppliers is USD 85. The company paid for this year's purchases and also paid down old supplier balances.

12. Cash paid to employees is salary and wage expense adjusted for salary and wage payable. If wage payable increased, the company expensed more than it paid, so cash paid is lower.

13. Tiny numerical: salary expense is USD 50 and salary payable increased by USD 6. Cash paid to employees is USD 44. The missing USD 6 is still owed to employees.

14. Other operating expenses can involve prepaid expenses and accrued liabilities. Prepaid expense is an asset. If prepaid expense increases, cash was paid before the expense hit, so cash paid is higher.

15. Tiny numerical: other operating expense is USD 40, prepaid expense increased by USD 3, and accrued liabilities increased by USD 5. Cash paid is USD 38 because USD 40 + USD 3 - USD 5 = USD 38.

16. Cash paid for interest is interest expense adjusted for interest payable. If interest payable decreases, the company paid more cash than this year's interest expense.

17. Tiny numerical: interest expense is USD 20 and interest payable decreased by USD 4. Cash paid for interest is USD 24. The company paid this year's interest plus old unpaid interest.

18. Cash paid for taxes is tax expense adjusted for tax payable, tax receivable, and deferred tax items. Keep the basic intuition: payable up means cash paid less; payable down means cash paid more.

19. Tiny numerical: tax expense is USD 30 and tax payable increased by USD 7. Cash paid for taxes is USD 23. The company recorded USD 30 of tax expense but has not paid USD 7 yet.

20. Direct method is useful because it shows gross cash behavior. You can see whether customer collections are improving, supplier payments are rising, or taxes and interest are eating cash.

Indirect Method: Operating Cash Flow

1. The indirect method starts with net income and converts it into operating cash flow. Your brain should hear: start with profit, remove non-operating stuff, add back non-cash charges, fix working capital timing.

2. Non-cash expenses are added back because they reduced net income without using current-period cash. Depreciation, amortization, and depletion are the usual examples.

3. Tiny numerical: net income is USD 100 and depreciation is USD 15. Before working capital, operating cash flow becomes USD 115. Depreciation hurt profit but did not take cash this period.

4. Gains are subtracted in indirect operating cash flow if the cash belongs somewhere else. A gain on sale of equipment is removed from operating cash flow because the sale cash belongs in investing cash flow.

5. Losses are added back for the same reason. A loss on sale of equipment reduced net income, but the sale itself is an investing activity, not an operating activity.

6. Tiny numerical: net income is USD 100, depreciation is USD 15, and gain on equipment sale is USD 6. Before working capital, operating cash flow is USD 109.

7. Current operating asset increase is subtracted. This is the cash-trapped rule. Receivables up means customers did not pay yet. Inventory up means cash is sitting in goods.

8. Current operating asset decrease is added. That usually means cash was released. Receivables down means old customer balances were collected. Inventory down means the company sold or used goods without buying as much new inventory.

9. Current operating liability increase is added. This is the cash-saved-for-now rule. Payables up means the company has not paid suppliers yet.

10. Current operating liability decrease is subtracted. The company used cash to pay down obligations that were already sitting on the balance sheet.

11. Tiny numerical: net income is USD 100, depreciation is USD 20, receivables increased by USD 12, inventory decreased by USD 5, and payables increased by USD 7. Operating cash flow is USD 120.

12. The shortcut is: operating cash flow equals net income plus non-cash charges minus net working capital investment, after removing non-operating gains and losses. But do not use the shortcut blindly; understand each balance sheet move.

13. If working capital increases because operating assets rise more than operating liabilities, operating cash flow goes down. The business is using cash to support growth.

14. If working capital decreases because operating liabilities rise or assets fall, operating cash flow goes up. That may be good collection discipline, or it may be temporary supplier financing.

15. Do not celebrate operating cash flow blindly. A company can boost operating cash flow by delaying supplier payments. That helps cash today but may not be sustainable.

Indirect to Direct Conversion

1. To convert indirect operating cash flow to direct style, first break net income back into revenue and expenses. Net income is too compressed; direct method needs line-by-line cash receipts and payments.

2. Then remove non-cash and non-operating items. Depreciation is not a direct cash payment. Gain or loss on asset sale belongs with investing cash flow, not customer or supplier cash.

3. Then convert each accrual line into cash using balance sheet changes. Revenue becomes cash collected. Cost of goods sold becomes cash paid to suppliers. Salary expense becomes cash paid to employees.

4. Tiny conversion drill: revenue is USD 100 and receivables increased by USD 10. Direct cash collected is USD 90.

5. Tiny conversion drill: cost of goods sold is USD 60, inventory increased by USD 8, and payables increased by USD 5. Cash paid to suppliers is USD 63.

6. Tiny conversion drill: salary expense is USD 40 and salary payable decreased by USD 3. Cash paid to employees is USD 43.

7. The conversion is usually approximate because published statements may not give every detail. But for exam purposes, use the balance sheet partner account and move carefully.

Investing Cash Flow

1. Investing cash flow is direct no matter what method is used for operating cash flow. The company either paid cash for long-term assets or received cash from selling them.

2. Equipment sale questions usually need three pieces: historical cost of asset sold, accumulated depreciation on asset sold, and gain or loss on sale.

3. Historical cost of equipment sold equals beginning equipment plus equipment purchased minus ending equipment. This tells you what old equipment disappeared from the books.

4. Accumulated depreciation on equipment sold equals beginning accumulated depreciation plus current depreciation expense minus ending accumulated depreciation.

5. Book value of equipment sold equals historical cost sold minus accumulated depreciation on that equipment. Cash received equals book value plus gain, or book value minus loss.

6. Tiny numerical: equipment cost sold is USD 30 and accumulated depreciation on that equipment is USD 18. Book value is USD 12.

7. Tiny numerical: book value is USD 12 and gain on sale is USD 5. Cash received is USD 17.

8. Tiny numerical: book value is USD 12 and loss on sale is USD 4. Cash received is USD 8.

9. Capital expenditure is not always equal to the increase in equipment on the balance sheet. If the company bought new equipment and sold old equipment in the same year, the net balance sheet change hides both moves.

10. Tiny numerical: beginning equipment is USD 100, purchases are USD 40, and ending equipment is USD 125. Equipment sold at historical cost is USD 15.

Financing Cash Flow

1. Financing cash flow is also direct no matter what method is used for operating cash flow. Debt principal, share issues, share repurchases, and dividends paid are shown as cash movements with capital providers.

2. If long-term debt falls and there is no other information, assume debt was repaid. Debt repayment is a financing cash outflow.

3. Tiny numerical: long-term debt fell from USD 90 to USD 70. Financing cash flow includes USD 20 debt repayment.

4. If common stock and additional paid-in capital increase, the company likely issued shares. Share issuance is a financing cash inflow.

5. If common stock falls because the company repurchased shares, that is a financing cash outflow. The company used cash to buy back its own equity.

6. Dividends paid can be found from retained earnings. Beginning retained earnings plus net income minus dividends equals ending retained earnings.

7. Tiny numerical: beginning retained earnings is USD 100, net income is USD 30, and ending retained earnings is USD 115. Dividends paid are USD 15.

8. Remember the dividend classification trap. Under U.S. GAAP, dividends paid are financing. Under International Financial Reporting Standards, dividends paid may be operating or financing.

IFRS vs U.S. GAAP

1. U.S. GAAP puts interest received in operating cash flow. International Financial Reporting Standards allows interest received in operating or investing.

2. U.S. GAAP puts interest paid in operating cash flow. International Financial Reporting Standards allows interest paid in operating or financing.

3. U.S. GAAP puts dividends received in operating cash flow. International Financial Reporting Standards allows dividends received in operating or investing.

4. U.S. GAAP puts dividends paid in financing cash flow. International Financial Reporting Standards allows dividends paid in operating or financing.

5. U.S. GAAP puts taxes paid in operating cash flow. International Financial Reporting Standards usually does the same, but taxes can be allocated to investing or financing if they are specifically tied to those categories.

6. Bank overdrafts are stricter under U.S. GAAP. They are treated as financing liabilities. Under International Financial Reporting Standards, they may be included in cash and cash equivalents if they are repayable on demand and part of cash management.

7. Both systems allow direct or indirect method for operating cash flow. Direct method is encouraged, but indirect method is more common in practice.

8. Under U.S. GAAP, if a company uses the direct method, it must also provide a reconciliation of net income to operating cash flow. In plain English: it still has to show the indirect bridge.

9. Exam memory line: U.S. GAAP is more locked. International Financial Reporting Standards gives choices. For comparison, normalize the classifications before judging ratios.

Final Exam Checks

1. If the question asks how statements connect, say this: balance sheet is point-in-time, income statement and cash flow statement explain activity during the period, and cash flow reconciles beginning cash to ending cash.

2. If accounts receivable increases, cash collected is less than revenue. Do not overthink it. Customers have not paid everything yet.

3. If inventory increases, purchases are more than cost of goods sold. The company bought more goods than it sold.

4. If accounts payable increases, cash paid to suppliers is less than purchases. Suppliers are financing the company for now.

5. If depreciation appears in indirect operating cash flow, add it back. It reduced net income but did not use current-period cash.

6. If there is a gain on sale of equipment, subtract it in indirect operating cash flow and show the cash sale in investing cash flow.

7. If there is a loss on sale of equipment, add it back in indirect operating cash flow and show the cash sale in investing cash flow.

8. If you see retained earnings, use it to solve dividends paid: beginning retained earnings plus net income minus ending retained earnings equals dividends.

9. If you see a direct vs indirect question, remember only operating cash flow presentation changes. Investing and financing sections stay the same.

10. If you see IFRS vs U.S. GAAP, check interest, dividends, taxes, and bank overdrafts. Those are the exam traps.