Cash Flow from operating activities
+ Depreciation expense
1. Record the cash outflow during the purchase which does not come in the net income figure.
2. Eliminate the increase in accounts payable for purchases, if there is any, from the increase on the total accounts payable figure, which is added to the net income to find the cash flow. This is because of the following reasons.
a. Any increase in accounts payable is added to the net income figure, because the accounts payable accounts has a non cash exp in the other side if the coin.
b. The accounts payable for purchases is an exemption, though purchase exp is a non cash exp. This is because, purchase exp does not get subtracted from the gross income to arrive at the net income.
c. So increase in accounts payable for purchases should not be added to the net income figure to find the cash flow.
3. Eliminate the non cash expense of COGS from the net income figure
This is done in the following operation of inventory.
Supplies exp 5000
Here the idea is that any decrease in the prepaid expenses is caused by a non cash expense. So that decrease has to be reversed to arrive at the net cash flow.
Consider the following case
Contingency liabilities comes in accrued liabilities