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A Conceptual Framework for the Reconciliation of Net Income to Operating Cash Flow
Ting J. Wang,
Governors State University
John Smigla, Myers University
Kamala Raghavan, Robert Morris University
ABSTRACT. This paper describes the fundamental concept of the reconciliation behind the indirect method of the statement of cash flow. A conceptual framework is presented to demonstrate how accrual- and cash-basis accounting relate to each other, and to illustrate the concept of reconciling these two methods. The conceptual framework recognizes additional categories of effects specified in the Statement of Financial Accounting Standards No. 95 as regards the indirect method, which makes the concept of reconciliation between the accrual- and cash-basis more thorough and complete. A basic understanding of accounting terms, such as accrual, deferral, recognition, and realization will help students understand this conceptual framework.
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