Calculating Cash for the Statement of Cash Flows Using Bauman's Cash Flow Method

by Robert Bauman

Overview

Most if not all accounting texts teach the subject of cash flow analysis from a “formulaic approach” – meaning, “Take this number and either add or subtract other numbers.” This approach forces those who use manual methods of calculations to remember many different “formulae” to correctly construct the Statement of Cash Flows using the two successive period-ending balance sheets and the linking income statement. For example, to compute the actual cash received from customers, the textbook versions use Sales Revenue and add the decrease or subtract the increase in Accounts Receivable. So, we have to “add decreases” or “subtract increases” (in this example) to determine cash flow from customers – but wait; it gets worse! Then, to determine payments for buying resale merchandise, we use the Cost of Goods Sold amount and add increases in Inventory and either add decreases or subtract increases in Accounts Payable, but we also might have to subtract decreases in Inventory and subtract increases or add decreases in Accounts Payable. Other accounts can be similarly bizarre. This approach is utterly difficult and confusing!

There is another, easier method of calculating cash for the Statement of Cash Flows. No “formulae” have to be memorized. It’s simple and easy, it requires knowledge and practice of only one general idea, and it’s logical throughout. It’s called “Calculating Cash for the Statement of Cash Flows Using Bauman’s Cash Flow Method” or “Bauman’s Method” for short. As I’ve told my students, either the textbook version or my method can be used to build the cash flow statement because either approach results in the same answer, but since “Bauman’s Method” is so much easier to learn and use, particularly with no memorization, why shouldn’t we use it?

“Bauman’s Method” has several sections that explain how it was developed, the concept and its application, as well as having comprehensive discussions about how those concepts and applications were derived and are used. It also uses two fictitious balance sheets and a linking income statement so the reader can visually examine the process. Finally, Statements of Cash Flows, both Direct and Indirect, are constructed.

Section I, Theory and Mnemonics, describes the genesis of “Bauman’s Method” and how easy it is to remember using a “tagging” technique, employing debits and credits, accounting knowledge, and simple mathematical constructs.

Section II is Analysis and Application, in which there is analysis of the linking income statement to the two connecting and successive balance sheets. This analysis will determine first, the accrual income amount on the income statement and second, how the beginning and ending balance sheet amounts affect the accrual income. This section contains a sample income statement and successive period-ending balance sheets of a fictitious company to present the first stages of cash flow analysis: examining the accounts. In other words, we are changing the accrual income to cash income.

Section III describes Building the Statement of Cash Flows, using both the Direct and the Indirect Method, and this section contains and uses the amounts calculated in Section II for construction of the cash flow statement.

Section IV has Personal Thoughts and Some Vanity about “Bauman’s Method,” its genesis, how it evolved, and why I use it as a teaching tool, as opposed to the typical textbook approach, to construct the cash flow statement.

Section V contains some End Notes and Some More Detailed Explanations on why all of the accounts except the Cash account are examined to determine the change in the Cash account balance from the prior balance sheet amount to the current ending balance sheet. Although there is some repetition herein of the concepts previously discussed in earlier sections, this section, in a more thoroughly detailed and comprehensive manner, discusses why and how the different accounts can be examined for changes between their beginning and ending balances.

Product Details

BN ID:	2940014908665
Publisher:	Robert Bauman
Publication date:	10/03/2011
Sold by:	Barnes & Noble
Format:	eBook
Pages:	16
File size:	273 KB

About the Author

Robert H. Bauman is accounting professor emeritus at Allan Hancock Community College in Santa Maria, CA. He received his BS cum laude in Business from the University of Southern California, majoring in accounting, and he received his MBA from Golden Gate University in San Francisco.

Enlisting in the United States Air Force in 1964, then-Airman Basic Bauman was trained as a defensive fire control mechanic and weapons loader for the radar- and gunner-controlled .50-caliber and 20mm tail turrets on B-52 bombers. He was selected as a Master Technician in the Strategic Air Command, and rose to the rank of Staff Sergeant in 1969. Attending night school when he wasn’t on the flight line, he qualified for the Airmen’s Education and Commissioning Program in 1969 and the Air Force selected him for reassignment to USC for two years. He earned his undergraduate degree in 1972 and then he attended Officer Training School where he was a distinguished graduate while receiving his commission. From 1972 to his Air Force retirement in 1988, Professor Bauman had various base- and command-level assignments in accounting and finance as well as cost, management analysis, and the Inspector General staff of Air Force Systems Command. He is a graduate of Squadron Officer School, Air Command and Staff College, Education With Industry at the Northrop Corporation, National Security Management, Professional Military Comptroller School, and the Air War College. His last active duty assignment at Headquarters Pacific Air Forces was to assist the US State Department by calculating the short- and long-term costs associated with the possible relocation of the electronic combat range then in the Philippines to various other locations in the Pacific. During his career in the Air Force, Airman-to- Major Bauman received twenty-four unit and personal awards and recognitions.

Following retirement from active duty in 1988 as a major, and after accounting positions with two publicly-held companies, Professor Bauman was chosen as a full-time accounting instructor, and later a tenured professor, at Hancock College from 1989 through 2004. He served as the Business Department Chairman for two years. He instructed bookkeeping, financial, managerial, cost, and computer accounting classes.

Professor Bauman currently resides near Cottonwood, Arizona, where he enjoys reading (especially historical works), Netflix movies, and golfing as much as he can.