I'm Larry Walther, this is principlesofaccount.com, chapter 16.
In this module,
we will look at the statement of cash flows prepared under a direct approach.
Now, let's begin by looking at the statement of cash flows
under a direct approach.
In the first section is cash flows from operating activities.
Here, you'll find the cash received from customers for sales on goods and services,
amounts paid for merchandise inventory, wages, interest, and so on,
to come up with $800,000 cash provided by operating activities.
The next section, investing activities section, I'm showing proceeds received
from sale of land, 750,000, purchase price of equipment, 150,000.
Basically, monies received from selling investment type assets or
monies dispersed to buy investment type assets.
The third major section is cash flows from financing activities.
The financing activities have to do with borrowing money, issuing stock,
repaying amounts loan, paying dividends, and so on.
Finally, we're just showing the change in cash, cash increase,
the net of the three sections, $530,000.
In this case, the company started with 170, and ended with 700,000 of cash.
There's also a separate amount that needs to be disclosed,
either attached to the bottom of the statement, as I've done or
on related notes, showing non-cash investing and financing transactions, such
as issuing stock in exchange for building where no cash changed hands directly.
Now, how do we get these amounts?
Well, in the book, there's a very comprehensive presentation of
this illustration, but let's just pick one, for
example, cash received from customers is shown to be $3 million.
In the book, the income statement is shown, and in that income statement,
there was 3,250,000 in sales, total sales, 3,250 million.
But by reference to the balance sheets, the beginning and ending balances,
ending accounts receivable is 850, beginning accounts receivable is 600.
We experienced a $250,000 increase in accounts receivable during the period,
a net 250,000 went uncollected.
So of the 3,250,000 is sales, only 3 million was collected,
total sales minus the increase in net receivables.
Next, we're going to look at how much cash is paid for merchandise inventory.
This calculation is a bit more complex,
we show 1,050,000 as the cash paid to buy inventory.
Let's start by thinking about the cost of goods sold.
The cost of goods sold, on the income statement, was 1,160 million,
that's different than the 1,050,000.
We need to first begin by considering that we also had a decrease in inventory.
A beginning inventory was 220, an ending inventory was 180, so
inventory decreased 40,000.
If you will, one of the 1,160,000 cost of good sold,
40,000 that came out of existing stock was not related to
inventory purchased during the period on a net basis.
So now we're at 1,120 million of the 1,160 million cost of goods sold,
40,000 was not bought, so 1,120 million is a preliminary calculation,
but we also need to consider that we might be buying inventory on credit.
Here, I'm assuming the beginning accounts payable was 200,000,
and the ending accounts payable was 270,000.
We had a net increase in accounts payable during the period of $70,000.
And so that would also be in essence a source of cash, payables that
we generated, inventory that we purchased on account, but haven't paid for yet.
So we had 1,120,000 of purchased inventory that was used, but
we paid 70,000 less than that, we'll pay the rest on a future period.
So we only paid for the merchandise that was sold during the period, $1,050,000.
A fairly complicated transaction,
one you'll probably want to refer to the textbook forward, think about a while.
Of course, there's reciprocal effects here.
If payables had decreased, for example, or if inventory had increased,
for example, we could have some opposite effects to consider.
We have another line in our cash flow statement for wages.
We're showing wages paid $480,000,
the income statement only showed 450,000 as wage expense.
We had a decrease in wages payable, in this case.
If you look at the balance sheet, beginning wages payable was 50, ending was
20, so we use 30,0000 of cash additionally to pay of preexisting payable.
The net cash used for wages was 480,000.
We had some other items on our income statement,
interest expense, other operating expenses, income taxes.
Those, they were no related payables, receivables,
the expense incurred was also the amount paid.
Had there been related balance sheet accounts for payables, the expense amount
would need to be adjusted similar to what we've done for some of the other items.
Two items within the income statement were not showing in the direct cash flow from
operations calculations, one was depreciation, it's a non-cash expense.
Another is the gain on the sale of a land,
that's shown separately as I'll discuss in a moment.
So let's look at the sale of a land.
In the investing activities section, I'm showing the land was sold for 750.
The journal entry, if we were to find it for the land sale, would be debit cash,
750, credit land, 600, credit the gain, 150.
That $150,000 gain was in the income statement,
but is not in the operating activity section.
Ask yourself how much cash were generated from this transaction, and
the answer is 750, the gain or loss is irrelevant in this case.
Cash generated was 750, that's what's shown in the investing activity section.
Purchase of equipment, 150,000 by reference to the balance sheet,
we see that change in equipment.
Equipment went up, we assume we used cash for that purpose.
We issued stock for $80,000, we can see that by looking at the balance sheet where
common stock additional paid-in capital went up 10 and 70,000 respectively.
Dividends in the statement of retained earnings, we show as dividend to 50,000,
that's shown as a financing activity's cash outflow.
Repayment of long-term loans and the finest activities section,
the balance sheet showed $900,000 decrease in our term long payable, and
we're showing that here as a cash outflow on our activity section.
Finally, we have the change in cash, we had increases in cash of 530,
compared to the beginning and ending balances.
The non-cash investing activities section, any time you have non-cash investing and
financing activities, you'll show them as an add-on, either in supplemental notes or
attached to the bottom of the statement of cash flows.
Finally, we need to do a reconciliation.
If we're using a direct approach, there's a supplemental schedule
reconciling net income to the cash flows from operating activities.
As shown on this particular slide, net income, plus depreciation expense,
minus gain, and so forth to come up with the same, 800,000 cash from operations.
So a direct approach has to be supplemented with this reconciliation.
Now, the presentation or preparation of this reconciliation, and
the details inherent therein is the subject of the next module.