Cash Flow Statement
Practice As You Learn
Practice As You Learn
Format of the Indirect Method:
Net Income
+ – Adjustments for Noncash Items
add expenses and losses
subtract revenues and gains
+ – Change in Current Assets and Liabilities
Current Assets:
subtract increases from prior year
add decrease from prior year
Current Liabilities:
add increases from prior year
subtract decreases from prior year
_________________________
= Cash from operating activities
Preparing the Cash Flow Statement using the Direct Method:
Collected from customers:
Sales or other revenue
+ beginning receivable
– ending receivable
= Cash collected from customers
Collected from investments – dividend and interest income:
Dividend/Interest Income
+ beginning receivable
– ending receivable
= Cash collected from dividends/interest
Paid to suppliers:
Cost of Goods Sold
– Beginning Inventory
+ Ending Inventory
+ Beginning A/P
– Ending A/P
= Cash Paid to Suppliers
Paid for all other expenses:
Expense
+ Beginning matching payable
– Ending matching payable
= Cash Paid for expense
Expense
– Beginning matching asset
+ ending matching asset
= Cash paid for expense
Always: + Beginning – Ending,
Except when matching an asset with an expense
Other key things to remember:
Investing Activities:
Report only the cash paid or received related to the change in long-term assets
Only use the change in the account when you have no other information
Financing Activities:
Report only the cash received or paid related to long-term liabilities or shareholders
Only use the change in the account when you have no other information
Non-Cash transactions are listed at the bottom of the cash flow statement
Cash Flow Statement – Practice Problem 1- Direct Method
Cash Flow Statement – Practice Problem 2 – Indirect Method
Use the following information for both practice problems:
A corporation reported the following information:
Current Year | Prior Year | |
Cash | 5,000 | 7,000 |
Accounts receivable | 12,000 | 18,000 |
Inventory | 35,000 | 28,000 |
Property & Equipment | 40,000 | 30,000 |
Accumulated Depreciation | (17,000) | (10,000) |
Total Assets | 75,000 | 73,000 |
Accounts Payable | 25,000 | 21,000 |
Income Taxes Payable | 4,000 | 1,000 |
Long Term Liabilities | 10,000 | 12,000 |
Common Stock | 14,000 | 12,000 |
Retained Earnings | 22,000 | 27,000 |
Total Liabilities & S/E | 75,000 | 73,000 |
Sales | 120,000 | |
Cost of Goods Sold | 80,000 | |
Gross Profit | 40,000 | |
Selling Expense | 25,000 | |
Depreciation Expense | 7,000 | |
Income Before Tax | 8,000 | |
Tax Expense | 3,000 | |
Net Income | 5,000 | |
Dividends Paid – $10,000 |
Prepare a statement of cash flows using the direct method and the indirect method.
Check Your Answer Problem 1
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.
CY | PY | |
Property & Equipment | 40,000 | 30,000 |
Accumulated Depreciation | (17,000) | (10,000) |
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.
CY | PY | |
Long Term Liabilities | 10,000 | 12,000 |
Common Stock | 14,000 | 12,000 |
Retained Earnings | 22,000 | 27,000 |
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:
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 |
Investing: | |
Purchase of Property/Equipment | (10,000) |
Total cash used for investing activities | (10,000) |
Financing: | |
Repayment of Long-term Debt | (2,000) |
Issue of Common Stock | 2,000 |
Paid dividends to shareholders | (10,000) |
Total cash used for financing activities: | (10,000) |
Total Change in Cash | (2,000) |
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.
Check Your Answer Problem 2
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:
CY | PY | Change | |
Accounts receivable | 12,000 | 18,000 | (6,000) |
Inventory | 35,000 | 28,000 | 7,000 |
Accounts Payable | 25,000 | 21,000 | 4,000 |
Income taxes Payable | 4,000 | 1,000 | 3,000 |
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)
Net Income | $5,000 |
+ Depreciation Expense | 7,000 |
Changes in current assets & current liabilities | |
Accounts Receivable | 6,000 |
Inventory | (7,000) |
Accounts Payable | 4,000 |
Income Tax Payable | 3,000 |
Cash from operating activities: | 18,000 |
4th Add Investing and Financing Sections:
(Same as the direct method)
Investing: | |
Purchased of Property/Equipment | (10,000) |
Total cash used for investing activities | (10,000) |
Financing: | |
Repayment of Long-term Debt | (2,000) |
Issue of Common Stock | 2,000 |
Paid dividends to shareholders | (10,000) |
Total cash used for financing activities | (10,000) |
Total Change in Cash | (2,000) |
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.
Cash Flow Statement – Practice Problem 3- Prepare a cash flow statement using the indirect method
Company XYZ had the following transactions during the current year:
1) Purchased equipment costing $10,000 for cash of $4,000 and signed a long-term note payable for $6,000
2) Accounts receivable increased $28,000
3) Repurchased treasury stock at a cost of $50,000, paid cash
4) Sold long term investments for $3,000 cash that cost $5,000
5) Inventory decreased by $22,000
6) Retained earnings increased by $15,000 and the company earned income of $17,000 for the year.
7) Sold a building with a cost of $150,000 and accumulated depreciation of $78,000 for cash in the amount of $175,000
8) Paid interest expense in the amount of $3,400
Prepare a cash flow statement using the indirect method.
Check Your Answer
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.