Hi, Else here.
And we're on to our second video for the statement of cash
flows T-account proof.
We have already done the steps in the process.
If you didn't watch that video, I highly
recommend you go and watch that video now.
We're moving on to item number 2.
I'm going to do the first example, Alexis Inc.
I've provided you with the information for Alexis Inc.
right here.
Let's look at it together.
Alexis Inc., I see that I have equipment and accumulated
appreciation.
I have 2010, which is of course the current year.
Note that the current year is the one that's always
closest to the account names.
I also have the prior year, right here, 2009.
I've given information with regards to equipment.
Generally you would have the whole statement
of financial position, also called balance sheet,
but I've just focused in on equipment and accumulated
depreciation.
Here's my additional information,
which tells me that my formula will not work.
I'm going to have to use a T-account proof.
In the additional information it says, during the year
the company sold some equipment for $2,000 cash.
The company did not purchase any equipment during 2010.
Now we know the information.
We know we have to do a T-account proof.
The very first thing I'm going to do
is I'm going to go through the steps in the process.
I know the first step is to create a blank T-account.
Since this is a sale of a tangible asset,
I can also provide the sale entry.
That would be a debit to cash, a debit
to accumulated depreciation, a credit to the equipment.
And because I don't have any information yet,
I can't do anything else, so I'm going to leave it there.
So there's the information that I have.
I go back up and of course the first thing
I do is fill in everything from the balance sheet.
There's my information from the balance sheet,
so I'm going to fill it in on my T-accounts.
And the first piece of information I have,
equipment has an opening balance of 78,000 and of course,
ending balance of 55,000.
I also know that accumulated depreciation starts with 24,000
and ends with 20,000.
The steps in the process then say
that I have to look at the income statement.
If you have not as yet downloaded this cash flow
problem, make sure you go and download the cash flow problems
because it's not going to make any sense unless you
have all the information available to you.
Go to the income statement and look
at any information that's available on the income
statement for Alexis.
You'll see sales, cost of sales, gross profit, operating
expenses, income from operations,
interest expense, income before income tax, income tax expense,
net income.
Notice there's no information that we
can use to fill in any of this.
So as soon as we realize that, we move on
to the additional information.
In the additional information, let's go
look, because I wrote the additional information down.
It says during the year the company sold some equipment
for $2,000 cash and they did not purchase any equipment.
All right, so what can I fill in?
I can place a 0 here, because they did not
purchase any equipment.
I also know that the cash value of the item sold was $2,000.
Do I have anything else?
I have nothing else, so let's start solving
for all of our unknowns.
I know here I can fill in this amount.
So what was my equipment sold for?
It was sold for $23,000.
That $23,000 is information that I can use
and I am going to use that information right here,
$23,000.
Moving on.
Accumulated depreciation.
I know from the additional information--
oh, I didn't write this down.
My apologies, but you have a copy of the question.
If you look at the copy of the question,
the item number 2 says depreciation expense of $12,000
is included in the operating expense category.
So we know that $12,000 is equal to the depreciation expense.
Well, if that's equal to the depreciation expense,
I can solve for my unknown right here.
And my unknown is 16,000.
That 16,000 is a debit to accumulated depreciation, which
only happens when there is a sale.
So now I can place 16,000 right here.
Now, can I solve for this unknown?
Yes I can, because when I'm looking at this information,
I can immediately see that this is equal to an amount that
is less than this.
So I know that I need an additional debit
to a loss on sale.
And the loss on sale is equal to what?
$5,000.
We've solved everything.
So now the key is to categorize the information that we
actually need on the cash flow.
Let's start with the 23,000 here.
Is this necessary on the cash flow statement?
And the answer is no.
This is historical cost information
and we do not require it in order to do everything
on our cash flow.
Let's move on to this, 16,000 accumulated depreciation.
Again, based on historical information,
we do not need this at all on our cash flow statement.
What is this?
This is the amount of the depreciation expense.
Depreciation expense has to be added back.
Where does it have to be added back?
It shows up on the income statement,
so it must be added back to the income statement
to eliminate the impact of depreciation expense.
Why do we eliminate it?
It's a non-cash item and in order
to convert net income from being accrual
accounting to being a cash accounting,
we have to remove it.
Removing a negative number from the income statement
is done by applying a positive number.
Let's move on.
Cash.
Definitely we need cash on our cash flow statement,
so where does it go?
Well, this is actually due to a sale of equipment.
So where does the sale of equipment go?
Investing.
Cause an inflow or an outflow?
Inflow.
Accumulated depreciation, we already
decided wasn't going to show up any more.
We know that the equipment is historical cost,
not going to show up, but the loss on sale
is going to show up.
Why?
Because it is on the income statement
right now as a reduction in net income or profit.
So if this is a reduction, does it
have anything to do with cash?
And the answer is no.
We can see right now this is the cash impact this
has nothing to do with cash.
If it has nothing to do with cash,
we have to remove its impact from net income/profit.
In that case, this is a debit, which
is a reduction in net income, so we're
going to have to remove it.
We're going to have to put this under operating
activities as a plus.
That will remove the impact of the loss on sale
from net income changing net income into cash
flow from operating activities.
So here we have three impacts to the cash flow--
depreciation expense, sale of equipment,
and the loss on sale.
We'll do another one in the next video.