Cash Flow from Operating Activities: Indirect Method

A

Only operating assets are considered, not fixed assets.

Under the indirect method of calculating cash flow from operating activities, net income is adjusted to arrive at the cash flow amount. This method begins with net income and then adjusts for various noncash items to determine the actual cash generated or used in operating activities.

Let's go through each option to determine which one is not adjusted in the calculation:

A. Noncash changes in fixed assets: This refers to the depreciation expense recorded on the income statement, which is a noncash expense. Since it does not involve an actual outflow of cash, it needs to be added back to net income to calculate the cash flow from operating activities. Therefore, this is adjusted for in the calculation.

B. Nonoperating items included in net income: Nonoperating items include items such as gains or losses from the sale of assets, interest income, and interest expense. These items are not directly related to the core operations of the business. To calculate cash flow from operating activities, nonoperating items are typically excluded from net income. So, these items are adjusted for in the calculation.

C. Noncash revenues and expenses: Noncash revenues and expenses are items that do not involve an actual inflow or outflow of cash but are recorded on the income statement. Examples include accrued revenue or expenses. Similar to depreciation, these noncash items need to be adjusted in the calculation of cash flow from operating activities. Therefore, this is adjusted for in the calculation.

D. Noncash changes in operating assets: Operating assets refer to current assets such as accounts receivable and inventory. Noncash changes in these assets are adjusted in the calculation of cash flow from operating activities. For example, an increase in accounts receivable means that sales have been made on credit, and cash has not been received yet. Therefore, this item is adjusted in the calculation.

E. Noncash changes in operating liabilities: Operating liabilities include accounts payable and accrued expenses. Noncash changes in these liabilities are also adjusted in the calculation of cash flow from operating activities. For instance, an increase in accounts payable means that expenses have been incurred but not yet paid in cash. Therefore, this item is adjusted in the calculation.

Based on the explanations above, the option that is not adjusted in the calculation of cash flow from operating activities is:

Option A: Noncash changes in fixed assets.

Noncash changes in fixed assets, primarily referring to depreciation expense, are already included in net income. Since they do not represent a cash flow item, they do not need to be further adjusted in the calculation. Therefore, option A is the correct answer.