Cash Flow Statement

Answers to Cash Flow Statement – Practice Problem 1- Direct Method 

1st Set up the format for calculating the operating activities section using the direct method and put in the numbers from the given financial statements

Start with the income statement and go down from the top.  Make sure that you use all revenues and expenses that will be paid in cash.

Current year is ending.    Prior year is beginning.    

Collected from customers:  Sales

Sales or other revenue	120,000
+ Beginning receivable	18,000
–  Ending receivable	(12,000)
= Cash collected from customers	126,000

Paid to suppliers: CGS

Cost of Goods Sold	80,000
– Beginning Inventory	(28,000)
+ Ending Inventory	35,000
+ Beginning A/P	21,000
–  Ending A/P	(25,000)
= Cash Paid to Suppliers	83,000

Paid for all other expenses:  Selling      

Selling Expense	25,000
+ Beginning matching payable	0
–  Ending matching payable	0
= Cash Paid for expense	25,000

There is no selling payable to match with selling expense.
No payable means that all expenses are paid as incurred and cash paid = expense

Depreciation is not used since it is a non cash (not paid) expense

Paid for all other expenses:  Taxes    

Expense	3,000
+ Beginning matching asset	1,000
– ending matching asset	(4,000)
= Cash paid for expense	0

Important: Make sure that you have used all current assets (except cash) and all current liabilities in the above calculations. All must be used and matched with an account on the income statement

2nd    Using the calculated amounts, prepare the operating section using the direct method

Cash received from:
customers – selling goods and services	126,000
Cash paid for:
purchases from suppliers	(83,000)
selling expenses	(25,000)
income taxes to the government	0
Total Cash paid:	(108,000)
=Cash flow from operating activities	18,000

3rd   Get the information to use for the investing section:

Go back to the balance sheet and identify all long-term asset accounts.
Cash related to the changes in these accounts will be reported in this section.

Property increases with a purchase, difference of 10,000.
Assume that the change was all in cash ONLY when you have NO other information.

Accumulated depreciation has no impact to cash and this account is ignored when preparing the financing section.

4th   Get the information to use for the financing section:

Go back to the balance sheet and identify all long-term liability and equity accounts.  Cash related to these accounts will be reported in this section.

A decrease of $2,000 indicates that long term liabilities have been repaid
An increase of $2,000 indicates that common stock has been issued

When you have no other information for the account, you assume the change was all cash.

Retained earnings changes with income $15,000 and dividends paid $10,000

Only dividends paid to shareholders is shown in the financing section

Net Income/Loss is not reported on the direct statement.

5th  Use the information to put the entire cash flow statement together:

The change in cash should agree with the change in cash on the balance sheet.
Current year is $5,000 and prior year was $7,000, a decrease of $2,000.

For investing and financing sections you must give a description of what happened.
You cannot just write the name of the account.

When there is no additional information provided for long-term assets, liabilities and owner’s equity, assume the change to the account is all cash.

Complete the operating section of the indirect statement:

1st Start with net income and identify any non-cash revenues or expenses

Net Income                           $5,000

+ Depreciation Expense     $  7,000

2nd Identify the current assets and current liabilities and compute the change:

3rd List the current assets and current liability accounts and the change

Current assets – add decreases and subtract increases
Current liabilities – add increases and subtract decreases

(Assets and Liabilities work opposite)

Do not list the change in “cash” (this is what you are reconciling)

4th  Add Investing and Financing Sections:
(Same as the direct method)

 Investing and Financing sections are the same for the direct and the indirect method.

The only difference in the two methods is the format of the operating section.

Total cash from operating activities must be the same for both methods.

1st   Identify the section of the cash flow statement where the transaction will be reported

Operating section:

2)  Accounts receivable is a current asset

5)  Inventory is a current asset

6)  Income is reported first on the indirect statement

4)  Loss on sale of long-term investments:
$3,000 – $5,000 = $2,000 loss

7)  Gain on sale of building of $103,000

Cash                                            $175,000
Accumulated Depreciation     $78,000
       Building                                       $150,000
       Gain on sale                                $103,000

Investing section: Long-term asset cash amounts 

1)  Equipment purchased for cash $4,000

4)  Cash received from sale of long-term investments of $3,000

 7)  Cash received from sale of building of $175,000

 

Financing section:  L/T Debt and Equity cash amounts

3)  Repurchase of treasury stock for the cash amount $50,000

6)  Dividend paid of $2,000       

(Net Income of 17,000 less the increase in retained earnings of 15,000)

Not included non-cash transactions:

1)  the $6,000 cost of equipment that was acquired by signing the note 

Not separately reported: 

8) interest expense is part of net income in the operating section of the indirect statement.
Revenues and expenses are not separately reported on the cash flow statement (unless they are not paid or received in cash).

 

2nd   Write the format of the indirect method cash flow statement 

For the investing and financing sections:
You must write a description of what occurred
Do not just write the account name

Net Income                                                      $17,000
– Gain on sale of building                           (103,000)
+ Loss on sale of investments                          2,000
Changes in current assets & current liabilities 

Accounts Receivable	(28,000)
Inventory	22,000
Cash used for operating activites:	($90,000)

Investing:

Purchase of Equipment	(4,000)
Proceeds from sale of LT investments	3,000
Proceeds from sale of building	175,000
Total cash from investing activities:	174,000

 Financing: 

Repurchase of treasury stock	(50,000)
Paid dividends to shareholders	(2,000)
Total cash used for financing activities:	(52,000)
Total Change in Cash	32,000

 

Non- cash transactions: 

The company acquired equipment costing $10,000 with a long-term note in the amount of $6,000.                
Key things to notice: 

When you have a sale of an asset you must determine the gain or loss and put that in the operating section.  The cash received goes in the investing section.

Only the cash related to the long-term asset or long-term liability is reported in the investing and financing section.   Do not just write the account name and the change in the account.