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Calculating Cash For The Statement Of Cash Flows Using Bauman's Cash Flow Method
Most if not all accounting texts teach the subject of cash flow analysis from a “formulaic approach” – meaning, “Take this number and either add or subtract other numbers.” This approach forces those who use manual methods of calculations to remember many different “formulae” to correctly construct the Statement of Cash Flows using the two successive period-ending balance sheets and the linking income statement. For example, to compute the actual cash received from customers, the textbook versions use Sales Revenue and add the decrease or subtract the increase in Accounts Receivable. So, we have to “add decreases” or “subtract increases” to determine cash flow from customers – but wait; it gets worse. Then, to determine payments for buying resale merchandise, we use the Cost of Goods Sold amount and add increases in Inventory and either add decreases or subtract increases in Accounts Payable, but we also might have to subtract decreases in Inventory and subtract increases or add decreases in Accounts Payable. Other accounts can be similarly bizarre. This approach is utterly difficult and confusing!
There is another, easier method of calculating cash for the Statement of Cash Flows. No “formulae” have to be memorized. It’s simple and easy, it requires knowledge and practice of only one general idea, and it’s logical throughout. It’s called “Calculating Cash for the Statement of Cash Flows Using Bauman’s Cash Flow Method” or “Bauman’s Method” for short. As I’ve told my students, either the textbook version or my method can be used to build the cash flow statement because either approach results in the same answer, but since “Bauman’s Method” is so much easier to learn and use, particularly with no memorization, why shouldn’t we use it?
“Bauman’s Method” has several sections that explain how it was developed, the concept and its application, as well as having comprehensive discussions about how those concepts and applications were derived and are used. It also uses two fictitious balance sheets and a linking income statement so the reader can visually examine the process. Finally, Statements of Cash Flows, both Direct and Indirect, are constructed.
Section I, Theory and Mnemonics, describes the genesis of “Bauman’s Method” and how easy it is to remember using a “tagging” technique, employing debits and credits, accounting knowledge, and simple mathematical constructs.
Section II is Analysis and Application, in which there is analysis of the linking income statement to the two connecting and successive balance sheets. This analysis will determine first, the accrual income amount on the income statement and second, how the beginning and ending balance sheet amounts affect the accrual income. This section contains a sample income statement and successive period-ending balance sheets of a fictitious company to present the first stages of cash flow analysis: examining the accounts. In other words, we are changing the accrual income to cash income.
Section III describes Building the Statement of Cash Flows, using both the Direct and the Indirect Method, and this section contains and uses the amounts calculated in Section II for construction of the cash flow statement.
Section IV has Personal Thoughts and Some Vanity about “Bauman’s Method,” its genesis, how it evolved, and why I use it as a teaching tool, as opposed to the typical textbook approach, to construct the cash flow statement.
Section V contains some End Notes and Some More Detailed Explanations on why all of the accounts except the Cash account are examined to determine the change in the Cash account balance from the prior balance sheet amount to the current ending balance sheet. Although there is some repetition herein of the concepts previously discussed in earlier sections, this section, in a more thoroughly detailed and comprehensive manner, discusses why and how the different accounts can be examined for changes between their beginning and ending balances.
- Amazon Sales Rank: #1685610 in eBooks
- Published on: 2011-10-03
- Released on: 2011-10-03
- Format: Kindle eBook
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