Confusion about Balance sheet equation and sum of the cashflows?

Question

I was solving a business case I had at school where i just needed to compute the cashflows (CF). Once I have done so I wanted to check that my calculations are all good by verifying that the following equation is true: CF(Operating) + CF(Investing) + CF(Financing) = Cash variation The issue is when I perform this calculation the sum of my cash flows gives me: Cash Variation + Net income Now I got really confused and verified back all my calculations which seemed all correct (i mean i am simply applying the formulas as they are). So what I did is I started over from the Balance Sheet equation in order to better grasp the dynamics of all this in my head and there I got a surprise: Balance sheet equation: Fixed Assets (FA) + Receivables(R) + Inventory (Inv) + Cash = Equity (Eq) + Debt-Long Term (DLT) + Debt-MidTerm(DMT) + Supplier (S) Then by moving things around I get: **-(R + Inv - S) + FA + (Eq + DLT + DMT) = Cash** Given (R + Inv - S) = WCR and if I introduce the Deltas D with last year at this point the equation becomes: **-D(WCR) + D(FA) + D(Eq + DLT + DMT) = D(Cash)** => **-D(WCR) + CF(Investing) + CF(Financing) = D(Cash)** Now to get my operating cash flow I must compute: Net Income - D(WCR) so If I add the net income on the left it must add to the right so I get: **(Net Income + Deprec/Ammort)** - D(WCR) + CF(Investing) + CF(Financing) = D(Cash) + **(Net Income + Deprec/Ammort)** => CF(Operating) + CF(Investing) + CF(Financing) = D(cash) + **Net income + DAM** What am I doing wrong ? There must be something I am completely missing because mathematically the equation CF(Operating) + CF(Investing) + CF(Financing) = Cash variation cannot be possible Thank you so so so much for any assistance

Answer 1

Is it possible you are preparing the statement of cash flows under the direct method and adding the net income?

So there are 2 methods of preparing the statement of cash flows - the indirect method and the direct method - these methods only affect the preparation of the operating activities section.

Under the indirect method you start with net income and reconcile noncash adjustments, gains/losses, etc. until you convert net income to net cash provided(used) by operating activities.

Under the direct method major classes of cash transactions are summarized (cash receipts from customers, cash disbursements paid to suppliers, etc.). Net income is not used in the calculation of the cash provided(used) by operating activities.

Maybe you are using the direct method and accidentally adding net income into the operating activities section.

Hope this helps - cheers!

Evan