EDIT: I had a friend help me with this and consider it resolved.

When figuring out your cash flow from operating activities using the indirect method, why don't we add cost of goods sold back to the net income amount?


I understand we start with net income and make adjustments to non cash expenses, because they didn't actually affect cash flow (for example, we add depreciation expense back to the net income amount, because no cash actually left the business), so why don't we add cost of goods sold back to net income as well?


It is a non cash expense, right? We may debit cash and credit sales revenue when we sell an item, but the related journal entry to debit cost of goods sold and credit inventory has nothing to do with cash or accounts receivable.


I asked my teacher and she said "We don't add back cost of goods sold because it's already included in the net income amount." which I don't understand either. How can it be included in the net income amount if it was already subtracted out to get net income? It's like saying "OK we have $500 in sales revenue, our ONLY expense was cost of goods sold for $200, therefore we have net income of $300." That $300 does not include the amount for cost of goods sold - it was subtracted out.


I mean, depreciation expense is the same thing. It's subtracted from revenues in order to calculate net income, but that is added back when doing statement of cash flow. And again, they're both non cash expenses... right? So what's the difference?

Any help would be greatly appreciated.