Hello,
Indicate which of the following current assests and current liabilities are operating accounts and thus included in the adjustment of net income to cash flow from operating activities and what is considered cash, investing, or financing accounts?

Accounts payable
Accounts receivable
Notes payable
Marketable securities
Accrued expenses
Inventory
Notes receivable-officers
Current portion of long term debt
Dividends payable
Income taxes payable
Interest payable
Certificates of deposit

What is the diff. b/wthe net income then and the cash flow of operations?

(Question moved from Introductions to Finance & Accounting to get more exposure.)

Net income just shows how much the business makes, but they could be uncollectable. In another words, the income cannot be all sitting at accounts receivable, which means no cash inflow.

Accounts payable-operating account
Accounts receivable-operating account
Notes payable-financing
Marketable securities-investing
Accrued expenses-operating account
Inventory-operating account
Notes receivable-officers--investing
Current portion of long term debt--financing
Dividends payable-financing
Income taxes payable--I believe operating
Interest payable--financing
Certificates of deposit--investment

The difference between net income and cash flow is that net income is based upon items such as account receivable that does not provide any cash. If I sold $5000 in a month, but never received any cash, the net income (assuming COGS is 0) is $5000, but the cash flow is $0.

You can't memorize every account. Here is a general rule of thumb. Think about your accounting equation: Assets = Liabilities + Equity. On the left is assets, and that is investing activities. On the right are liabilities and equity, and those are financing activities.

The exception is the current stuff, i.e. current assets (like accounts receivables) and current liabilities (like accounts payable). Those are not considered investing and financing. They are related to your day-to-day operations and therefore are operating activities.

There's an exception to the exception though. :-( Dividends payable is a current liability but is not operating. It still goes in with the financing stuff cause it's related to stock.

So take your balance sheet, knock off current assets and the rest is investing. Then take the whole other side and knock off current liabilities and the rest is financing.

Morgaine explains it pretty well. I was never taught that way, but after doing accounting for awhile, the stuff will come to you much easier. There are three main sections to a Cash Flow Statement: 1. Operating activities 2. Investing activities 3. Financing activities

Figuring out the difference between them I just by default put stock activity into the financing part because you receive money when you initially sale the stock. That is equity financing and your repayment on that financing is to give dividends. Things like paying off bond debt and loans are also financing. It is pretty straightforward: Did the transaction about to be made result from getting money from the party you are giving money back to? If this is so, then they were a source of financing and paying them back is also in the financing category.
Investing is basically the opposite, if you are receiving money from a party that you gave money to previously, they are paying you back and the initial money you paid out was an investment. The money you are receiving is the fruit of that investment. Basically, an investment for one, is financing for another. The banks loan to you was an investment from their perspective, but financing by you. Operating activities are current and what are used to run the business. Inventory, accounts receivable, payable, etc.

Quote:

---

Originally Posted by CARLA BIANCHI

Hello,
Indicate which of the following current assests and current liabilities are operating accounts and thus included in the adjustment of net income to cash flow from operating activities and what is considered cash, investing, or financing accounts?

accounts payable
accounts receivable
notes payable
marketable securities
accrued expenses
inventory
notes receivable-officers
current portion of long term debt
dividends payable
income taxes payable
interest payable
certificates of deposit

What is the diff. b/wthe net income then and the cash flow of operations?

---

Inventory