accounting equation that assets equal liabilities plus owners’ equity. The accounting
equation helps teach the basic balance sheet relationship, and the effect of transactions
on this relationship. It provides a solid anchor to a student who is being
introduced to accounting. The use of the balance sheet equation to explain why
changes in certain accounts have to be added or subtracted in the reconciliation of
net income to cash flow from operating activities can provide a deeper understating
of the statement of cash flows to students, as well as increase their understanding of
the articulation of financial statements.
In this article, I provide an analytical framework that can be used in explaining
the reconciliation of net income to cash flow from operations from the first principles
of the basic accounting equation. This approach is particularly insightful for
intermediate level accounting courses and financial statement analysis courses that
cover the statement of cash flow in greater detail. It is also useful for introductory
accounting courses of MBA programs.
The rest of the article is organized as follows. Section 2 provides the analytical
model of the paper. Section 3 provides a numerical example of the application.
Section 4 concludes the paper.