Watch out for these common pitfalls:
• BS doesn’t balance – it must always balance
• Duplicating effects of BS changes on the CFS
• Reflect each Balance Sheet item once and only once on the Cash Flow Statement, and vice versa.
• Affect an increase/decrease in assets or liabilities have on the BS
• If an Asset goes up, cash flow goes down; if a Liability goes up, cash flow goes up, and vice versa.
• Forgetting to flip signs on the CFS
• Common example is Gains or Losses on Asset Sale: Must list in both cash flow from operations and cash
flow from investing because you are re-classifying the cash flow. You subtract it from CFO and instead
include it as part of the full selling price of the assets in CFI instead.
• Accounts payable vs. Accrued expenses
• Mechanically, they are the same: Liabilities on the BS used when you’ve recorded an IS expense for a
product/service you have received, but have not yet paid for in cash. The difference is that Accounts
Payable is mostly for one-time expenses with invoices, such as paying for a law firm, whereas Accrued
Expenses is for recurring expenses without invoices, such as employee wages, rent, and utilities
• Accounts receivable vs. Deferred revenue
• Primary differences: (1) Accounts Receivable has not yet been collected in cash from customers,
whereas Deferred Revenue has been (2) Accounts Receivable is for a product/service the company has
already delivered but hasn’t been paid for yet, whereas Deferred Revenue is for a product/service the
company has not yet delivered
• Accounts Receivable is an Asset because it implies additional future cash whereas Deferred Revenue is a
Liability because it implies the opposite.
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