Net Income from the Income Statement is used on the Cash Flow Statement as what?

• A. It starts the Cash Flow Statement
• B. It is ignored on the Cash Flow Statement
• C. It is the starting point, then non-cash items are added back or subtracted
• D. It is not related to the Cash Flow Statement

Answer: (C)

The main idea here is how the cash flow from operations is derived from accrual accounting. When you prepare the cash flow statement using the indirect method, you start with net income from the income statement. Then you adjust for items that affected net income but didn’t involve actual cash in the period. These adjustments include adding back non-cash expenses like depreciation and amortization, impairments, and stock-based compensation, and subtracting any non-cash gains while adding any non-cash losses. You also adjust for changes in working capital (like accounts receivable, inventory, accounts payable) to reflect the timing differences between when revenues and expenses are recognized and when cash is actually received or paid. All of this converts net income (an accrual figure) into cash provided by or used in operating activities.