Cash Flows from Operating Activities
Posted on February 23, 2009 - Filed Under Finance
The first section, cash flows from operating activities, focuses on the sources and uses of cash tied directly to operations. Of course, the most important source is net income, so its value for 2004, $7,860,000, is listed first. However, net income does not equal cash flow, so various adjustments must be made.
The first adjustment is to add back the noncash expenses that appear on the income statement. As we explained in Chapter 3, as a first approximation, the cash flow of a business can be approximated as net income plus depreciation: $7,860,000 + $6,405,000 = $14,265,000.
Adjustments are then made for changes in those current asset and liability accounts that are directly affected by operations. For Sunnyvale, this means the net patient accounts receivable, inventories, accounts payable, and accrued expenses accounts. The theory for these adjustments is that these accounts
stem directly from operations; hence, any cash that either is generated by, or is used for, these accounts should be included as part of operations. In addition, using balance sheet data to calculate operating cash flow recognizes that under accrual accounting not every dollar of revenues or expenses listed on the income statement represents a dollar of cash flow. Note that marketable securities and notes payable, although current accounts, are financing accounts that are not directly tied to operations, and hence these accounts will be handled in the third section of the statement of cash flows. Also, note that the entire statement focuses on the change in cash, so that will be the output of the statement rather than one of its entries.
Taken From : HEALTHCARE FINANCE
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