Income statement

The statement of cash flows for Starbucks Corporation appears on page 48 in the 2014 annual report. The statement of cash flows will not inform the reader regarding the method used to prepare the statement.  Joel's response is correct in regards to the fact that the Starbucks used the indirect method to prepare the operating activities section of the statement of cash flows.

Illustration 12-14 identifies adjustments and how each adjustment is added or subtracted from net income when converting net income to the cash provided by operating activities. Adjustments to net income appear in the operating activities section of the statement of cash flows when prepared using the indirect method. The indirect method focuses on the differences in net income reported on the income statement (prepared using the accrual basis of accounting) and net cash provided by operating activities. The line item for net cash provided or used by operating activities that appears in the statement of cash flows prepared using the indirect method will be the same dollar amount that will appear when the direct method was used. The sections for the investing and financing activities will appear the same when using the indirect method or the direct method.

I located an article from the Online Library that relates to comparing net income reported on the income statement to the net cash provided from operating activities on the statement of cash flows. The article, Reality Check: Accounting Alerts for Investment Advisors discusses how misleading financial reporting and unrealistic assumptions may result when management focuses on presenting the company's earnings in the most favorable position. The article discusses the misleading financial reporting presented by Enron, Lucent Technologies, Boston Chicken, and Sunbeam in the late 1990's. As indicated in the article, the financial statements for these companies may have been in accordance with generally accepted accounting principles; however, the financial statements did not portray economic reality. Since net income is computed based on the accrual basis of accounting, some of the dollar amounts presented on the financial statements may be distorted as a result of unrealistic assumptions used in arriving at the reported dollar amounts (Olstein, 2006). Investors are able to identify a red flag alert when a company consistently reports a significant higher dollar amount for earnings (income statement) than cash flows from operations reported on the statement of cash flows (Olstein, 2006). For example, Enron continued to report a high dollar amount for earnings while reporting a negative cash flow.

Class - How does the net income reported on the income statement for the company you selected for this week's discussion compare to the net cash provided from operating activities reported on the statement of cash flows? In your response, please identify the company, the dollar amount of net income that appears on the income statement, and the dollar amount for the net cash provided from operating activities reported on the statement of cash flows. Remember to cite the source for the statement of cash flows to support your response. As an investor, would you prefer to review the statement of cash flows prepared using the indirect method or the direct method? Remember to include an explanation to support your response.

References

Kimmel, P. D. (2013). Financial accounting: Tools for business decision making. Retrieved from University of Phoenix eBook Collection. 

Olstein, R. A. (2006). Reality Check: Accounting Alerts for Investment Advisors. CPA Journal, 76(1), 10. Retrieved from EBSCOhost.