Chapter 13: Example of preparing cash flow statement

1. Converting Sales (services) revenues to Cash received from customers Please indicate the impact being increase (+), decrease (-), or none (n/a). Transactions Cash sale Credit sale Collection of A/R Sales Revenue + + NA Cash received from customers + NA + Acc. Receivable NA +

Thus: Sales revenue (+) Increase (decrease) in A/R = Cash received from customers Example: Sales revenue for year 2005 was $600,000. The Accounts Receivable had a balance of $45,000 at 1/1/2005 and a balance of $52,000 at 12/31/2005. How much was the cash received from customers? T-account method BB EB Accounts Receivable 45,000 600,000 ? Cash collection 52,000

The $7,000 increase in A/R indicates that sales revenue is more than cash received by $7,000. Therefore cash received from customers = $600,000 7,000 = 593,000 2. Converting COGS to Cash paid to suppliers Transactions Cash purchase Credit purchase Payment of A/P Purchase of inventory + + NA Cash paid to suppliers + NA + Acc. Payable NA +

Therefore: Purchase (+) Increase (decrease) in A/P = Cash paid to suppliers Also, Beginning Inventory + Purchases COGS = Ending Inventory Thus, Purchases = COGS +() increase in inventory Cash paid to suppliers = COGS +() increase in inventory(+) Increase (decrease) in A/P Example: Cost of goods sold for year 2004 was $20,000. The Inventory had a balance of $12,000 at 1/1/2004 and a balance of $10,000 at 12/31/2004. Accounts Payable had a balance of $13,000 at 1/1/2004 and a balance of $13,600 at 12/31/2004. How much was the cash paid to suppliers? T-account method BB Purchases? EB Inventory 12,000 20,000 10,000

Chapter 13: Example of preparing cash flow statement

Accounts Payable BB 13,000 Cash paid to vendors? Purchases of inventory EB 13,600 Purchase =18,000 The $600 increase in A/P indicates that cash paid to suppliers is less than purchase of inventory by $600. Therefore cash paid to suppliers = 18,000 600 = 17,400 3. Converting accrued expenses (e.g. salary expense) to cash paid (to employees) Example: Salary expense for year 2003 was $500,000. Salary payable had a balance of $35,000 at 1/1/2003 and a balance of $10,000 at 12/31/2003. How much was cash paid to employees in year 2003? T-account method Salary Payable 35,000 Cash paid to employees? 500,000 10,000 BB BB

The $25,000 decrease in salary payable indicates that cash paid to employees is more than salary expense by $25,000. Therefore cash paid to employees = 500,000 +25,000 = 525,000 4. Converting prepaid expenses (e.g. rent expense) to cash paid (for rent). Example: Rent expense for year 2003 was $12,000. Prepaid rent had a balance of $2,000 at 1/1/2003 and a balance of $3,000 at 12/31/2003. How much was cash paid for rent in year 2003? T-account method Prepaid rent BB 2,000 12,000 Cash paid for rent EB 3,000

The $1,000 increase in prepaid rent indicates that cash paid for rent is more than rent expense by $12,000. Therefore cash paid for rent = 12,000 +1,000 = 13,000

Chapter 13: Example of preparing cash flow statement

Following is the income statement for year ended on March 31 2008, and the balance sheet at March 31 2008. Sales Revenue Expenses: Cost of Goods Sold Depreciation Expense Insurance Expense Interest Expense Total Expenses Net Income $2,600 800 300 50 30 (980) $ 1,420

3/31/08 Cash Acct. receivable Inventory 6,895 2,000 500

3/31/07 6,495 1,150 100

Change 200 850 400 Acct payable Other payable Interest payable Notes payable (long term) Total Liabilities Common Stock APIC Retained Earnings Tot. Liab. &S.E.

3/31/08 30

3/31/07 800 50 -

Change (800) (50) 30

Prepaid insurance Machine Acc. Depr.

175 4,000 (300)

325 -

(150) 4,000 (300)

3,000 3,030 1,500 6,500 2,240

1,000 1,850 1,000 4,000 1,220

2,000

500 2500 1,020

Total Assets

13,270

8,070

13,270

8,070

Additional information: Bought a machine costing $4,000, which was paid by signing a notes payable of $3,000 and cash $1,000; Issued common stock of $________ (you need to infer the number); Paid cash dividend of $__________ (you need to infer the number); Paid principal on a note payable of $________ (you need to infer the number) Required 1. Provide the cash flow statement for the year using indirect method.

Chapter 13: Example of preparing cash flow statement

Statement of Cash Flows For the Year Ended March 31, 2008 Cash flows from operating activities: Net income Adjustments to reconcile Net Income to net cash flows from operating activities + Depreciation expense Increase in Acc. Receivable Increase in Inventory + Prepaid insurance Increase in Acc. Payable Increase in Other payable + Decrease in Interest payable Net cash provided (used) by operating activities Cash flows from investing activities: Cash paid for acquiring machine Net cash provided (used) by investing activities Cash flows from investing activities: Cash paid for principal on notes payable Cash received from issuance of stock Cash paid for dividend Net cash provided (used) by financing activities Net increase (decrease) in Cash & Cash Equivalents during 2008 Cash at March 31, 2007 Cash at March 31, 2008 Non-cash investing and financing transactions: (List below, if any.) During year 2008, the company signed a note of $3,000 in buying the machine. . A few explanations: Cash paid for acquiring machine (1,000) Since change in accumulated depreciation = deprecation expense, we can infer that the company did not sell any of the equipment. Thus, the change in equipment account corresponds to purchase of machine. As mentioned, the cash used for the equipment costing 4,000 was only $1,000. The non-cash transaction of $3,000 is disclosed as a note to the cash flow statement. Cash paid for principal on notes payable (1,000) Notes payable would have increased by $3,000 if there is no repayment on principal. Since the change in notes payable was only $2,000, the cash payment on principal was 2,000. Cash received from issuance of stock 3,000 The sum of increases in both common stock and APIC represents cash received from the issuance of stock. Cash paid for dividend (400) Retained earnings would have increased by net income of $1,420 if there was no dividend. Thus the increase of $1,020 in retained earnings indicates that there was a cash dividend of $400.

$1420

300 (850) (400) 150 (800) (50) 30 (200) (1,000) (1,000) (1,000) 3,000 (400) 1,600 400 6,495 6,895

Chapter 13: Example of preparing cash flow statement

Requirement 2: Determine the following: cash collected from customers, cash paid to suppliers, and cash paid for interest. Cash collected from customers = Sales revenues Increase in Acc. Receivable = 2,600 850 = $1,750 Cash paid to suppliers = Purchase + decrease in A/P Purchase= COGS + increase in inventory =800 +400 =1200 Cash paid to suppliers = 1200+ 800 = $2000 Cash paid for interest = Interest expense - increase in interest payable = 30- 30 = 0 (All accrued expense items follow above analyses. If you cant follow the solution, please refer to the example on salary expense and salary payable.)

Cash paid for insurance (* The numbers provided are not consistent and cant be solved for a reasonable solution. Please work the exercise using following information instead. Insurance expense = 250, and Prepaid insurance decreased by $150. Cash paid for insurance = Insurance expense - increase prepaid insurance = 250 150 = 100 (All prepaid expense items follow above analyses. If you cant follow the solution, please refer to the example on prepaid rent and rent expense)