Which section of the statement of cash flows is the income statement directly connected to?

Which section of the statement of cash flows is the income statement directly connected to?

• A. Operating
• B. Investing
• C. Financing
• D. Supplemental

Answer: (A)

The income statement is directly connected to the cash flow from operating activities. Net income from the income statement serves as the starting point for the cash flow statement. To convert accrual net income to cash, the statement of cash flows adds back noncash items (like depreciation and amortization) and adjusts for changes in working capital (such as accounts receivable, accounts payable, and inventory). This creates the cash generated by operating activities. The investing section tracks cash used for long-term assets and investments, while the financing section covers cash flows from borrowing, repaying debt, issuing stock, and paying dividends. The supplemental section includes noncash activities. So, the operating section is the direct link to the income statement.

The income statement is directly connected to the cash flow from operating activities. Net income from the income statement serves as the starting point for the cash flow statement. To convert accrual net income to cash, the statement of cash flows adds back noncash items (like depreciation and amortization) and adjusts for changes in working capital (such as accounts receivable, accounts payable, and inventory). This creates the cash generated by operating activities. The investing section tracks cash used for long-term assets and investments, while the financing section covers cash flows from borrowing, repaying debt, issuing stock, and paying dividends. The supplemental section includes noncash activities. So, the operating section is the direct link to the income statement.