USA Cost of Goods Sold in Indirect Statement of Cash Flow

[I Am Abomination]

Hello,

Let me preface this by saying I am someone who prefers to understand concepts rather than memorize formulas or procedures without any real knowledge of why those formulas or procedures work. So any detailed explanations would be greatly appreciated.

When preparing a statement of cash flow using the indirect method, I know we start with the net income amount from the income statement and make adjustments to non cash expenses such as depreciation and amortization. My question is, why is cost of goods sold not included in these non cash expenses? It is a non-cash expense, is it not? A customer could purchase an item on credit, and we would debit cost of goods sold without any cash exchanging hands. So why do we leave this number alone when making adjustments to net income using the indirect method?

If it is considered a cash expense, could you explain why?

Thank you.

 

[Alex LaPorta]

Hi, I am an accounting student, not an accountant, but this is the way I understand it:

In the direct method, you can calculate the amounts paid to suppliers utilizing COGS plus increases in inventory less increases in accounts payable. COGS itself is defined as the direct costs of production of goods sold. It's calculated as part of the income statement.

However because it's defined as the direct costs of production, it wouldn't be examined as part of an indirect examination of the statement of cash flows. You're already determining the costs of the sales by analyzing the changes in expenses that occur in the financial statements. When you adjust the SCF using the indirect increase/decrease in accounts payable, you're basically figuring out what was owed in expenses versus what was actually paid.

Hope it helps.