Which sequence correctly describes preparing a simple cash flow statement from a monthly forecast?

Which sequence correctly describes preparing a simple cash flow statement from a monthly forecast?

• A. Start with net income, adjust non-cash items, adjust for changes in working capital, add/subtract financing/investing cash.
• B. Begin with ending cash balance and work backward to forecast cash flows.
• C. Start with depreciation and amortization, then add capital expenditures, then adjust for changes in working capital.
• D. Forecast cash receipts and payments directly without income statement adjustments.

Answer: (A)

Starting from net income is the standard way to build a simple cash flow statement using the indirect method from a monthly forecast. Net income shows profitability under accrual accounting, but it isn’t the actual cash you’ve received or paid. To convert it to cash flow from operations, you add back non-cash charges like depreciation and amortization, since they reduce net income without using cash. Next, you adjust for changes in working capital—things like accounts receivable, inventory, and accounts payable. An increase in receivables or inventory uses cash, so you subtract those changes; an increase in payables frees up cash, so you add that change. After these operating adjustments, you include cash flows from financing activities and investing activities to complete the cash flow picture. This sequence ties forecasted profitability to the actual cash impact and clearly separates operating activities from financing and investing. The other options describe alternative approaches (direct method, backward calculation, or partial adjustments) that don’t align with this standard indirect-method flow.

Starting from net income is the standard way to build a simple cash flow statement using the indirect method from a monthly forecast. Net income shows profitability under accrual accounting, but it isn’t the actual cash you’ve received or paid. To convert it to cash flow from operations, you add back non-cash charges like depreciation and amortization, since they reduce net income without using cash. Next, you adjust for changes in working capital—things like accounts receivable, inventory, and accounts payable. An increase in receivables or inventory uses cash, so you subtract those changes; an increase in payables frees up cash, so you add that change. After these operating adjustments, you include cash flows from financing activities and investing activities to complete the cash flow picture. This sequence ties forecasted profitability to the actual cash impact and clearly separates operating activities from financing and investing. The other options describe alternative approaches (direct method, backward calculation, or partial adjustments) that don’t align with this standard indirect-method flow.