Cash Flow Statement

C.  The indirect statement reconciles net income to cash from operations.  It does not provide the details of where cash comes from and what cash is paid for related to operations.  Cash from/paid for specific items is listed on the direct statement (a. & b.). (d) is reported on the balance sheet.

C.   The indirect statement shows total net income and does not show the components of income.  The direct statement shows cash from customers which is not the same as revenues earned. (a.) is shown on both statements in the investing section.   (b.) is shown on both statements in the financing section. (d). is the total change in cash from operating activities shown on both statements.

D.  This is a non cash gain or loss.  Non cash revenues/expenses/gains/losses are not reported on the direct cash flow statement.  They are reported as a reconciling item to net income in the operating section of the indirect statement.

B.  An increase to a current asset means that less cash was collected than sales or that more assets were paid for than was used and expensed.  Less cash received than revenues, or more cash paid than expense, is negative on the indirect cash flow statement. The change is current assets is considered when computing the amounts reported on the direct cash flow statement (d).

C.  This is a non cash expense; an expense on the income statement that was not paid this period.  Non cash expenses are added to net income on the indirect statement to get to cash generated. Non cash expenses are not considered when preparing the direct statement (d.)

Non cash activity:  Purchased $10,000 equipment with a note payable.

Important:  All current assets and liabilities must be matched with cash revenues and expenses.

Operating section:

Non cash revenues and expenses are not reported on the direct statement:

Ignore depreciation expense and the gain on the sale of land

Investing and Financing sections:  Only the cash part of the transaction is reported

The $10,000 borrowed to finance the equipment purchase is a non cash activity;

No cash was received, 

Equipment was received which is not cash.

Current Assets –  
Increases are negative        
Decreases are positive

Current Liabilities – 
Increases are positive      
Decreases are negative

Total cash from operating activities must be the same for the indirect method and the direct method.   The same components of revenues, expenses, current assets and current liabilities are used for both.

Direct – 
“Directly” matches revenues and expenses with the corresponding current asset and current liability

Indirect – 
Nets all revenues and expenses to start with net income, considers the non cash revenues and expenses, and then just lists the current assets and current liabilities.

 A.
Cost of Goods Sold                123,000
– Beg Inventory                        (31,000)
+ End Inventory                        32,000
+ Beg A/P                                   10,100
– End A/P                                     (8,900)
Cash paid to suppliers          125,200

B. 
Salary Expense                         21,000
+ Beg salary payable                 3,200
–  End salary payable               (2,500)
Cash paid                                   21,700

C. 
Interest Expense                         3,000
     + Beg interest payable             400
     –  End interest payable           (800)
     Cash paid                                2,600

D. 
Rent Revenue                               8,000
– Beg unearned rev                    (6,500)
+ End unearned rev                    3,500
Rent cash collected                     5,000

E. 
Ending Equipment                     38,000
– Beginning Equipment            (33,000)
Change                                            5,000
+ Cost of equipment sold          34,000
Purchases of equipment           39,000

F. 
Ending A/D                                  19,000
– Beginning A/D                         (29,000)
Change in A/D                           (10,000)
+ Sold A/D                                   15,000
Depreciation Expense                 5,000

G. 
Ending R.E.                                  36,000
– Beginning R.E.                         (22,000)
Difference                                   14,000
– Income                                     (50,000)
Dividends Paid                          (36,000)

H. 
Cash from customers                        204,000
Rent collections                                      5,000

Cash paid to suppliers                     (125,200)
Cash paid for salaries                        (21,700)
Cash paid for interest                          (2,600)

Cash from operating                           59,500

Investing Activities:
Purchase equipment                          (39,000)
Proceeds from sale of equipment     17,000
Cash from investing activities           (22,000)

Financing Activities:
Repayments on notes payable          (5,000)
Paid dividends                                    (36,000)
Cash from investing activities         ( 41,000)

Total Change in Cash                           (3,500)
                                                            =======

I.  Indirect Method

Net Income                                          50,000
Loss on sale                                           2,000
Depreciation expense                          5,000

Change in current assets and liabilities
Accounts Receivable                            8,000
Inventory                                              (1,000)
Salaries Payable                                     (700)
Accounts Payable                                (1,200)
Interest Payable                                       400
Unearned Rent Revenue                    (3,000)

Cash from operating activities:    59,500

Investing and Financing sections are same as previous

Sales                                                  196,000
– CGS                                                (123,000)
Gross Profit                                        73,000
– Operating Expenses:
     Salary expense                            (21,000)
     Depreciation expense                  (5,000)
= Income from operations               47,000
     Rent Income                                    8,000
     Interest Expense                            (3,000)
     Loss on sale                                    (2,000)
= Net Income                                      50,000