Operating Activities

Inflows from:
• Interest and dividends
received. +
• Sales to customers. Cash
Flows
Outflows to: from
• Suppliers of merchandise and Operating
services.
• Employees.
_ Activities
• Lenders for interest.
• Governments for taxes.
Investing Activities
Inflows from:
• Selling investments and plant
assets.
• Collecting of principal on loans. + Cash
Flows
from
Outflows to:
• Purchase of investments and
Investing
plant assets. _ Activities
• Purchase debt or equity
investments.
• Make loans.
Financing Activities
Inflows from:
• Short-term and long-term
borrowing.
+ Cash
• Owners (for example, from
issuing stock). Flows
from
Outflows to: Financing
• Make payments on borrowed _ Activities
funds.
• Owners for dividends.
• Purchase treasury stock.
 Now, let’s
prepare a direct
method
Statement of
Cash Flows for
Martin Co.
Direct Method
Martin Co.
Comparative Balance Sheets - Assets
December 31,
2006 2007
Cash $ 60,000 $ 70,370
Accounts Receivable, net 27,000 35,000
Inventory 230,000 200,000
Trading Securities - 25,000
Equipment, net 500,000 425,000
Investments 100,000 130,000
Total Assets $ 917,000 $ 885,370
Direct Method
Martin Co.
Comparative Balance Sheets - Liabilities and Equity
December 31,
2006 2007
Accounts Payable $ 15,000 $ 12,000
Salaries Payable 7,000 5,000
Interest Payable 11,950 7,350
Income Tax Payable 20,000 17,000
Notes Payable, Bob's Bank 70,000 60,000
Bonds Payable 250,000 150,000
Premium on Bonds Payable 5,000 4,000

Common Stock 450,000 500,000

Retained Earnings 88,050 130,020
Total Liabilities and Equity $ 917,000 $ 885,370
Direct Method
Martin Co.
Income Statement Amounts
For the Year Ending December 31, 2007

Sales Revenues $ 800,000

Cost of Goods Sold 560,000
Depreciation Expense 5,000
Interest Expense 28,050
Income Tax Expense 27,980
Salary Expense 80,000
Other Expenses 71,000
Amortization of Bond Premium 1,000
Gain on Sale of Equipment 3,000
Extraordinary Loss 30,000
Equity in Investee Income 40,000
Net Income $ 41,970
Direct Method
Additional Information
• Trading Securities were purchased during 2007 at a
cost of $25,000.
• Equipment with a book value of $40,000 was sold
during the year for $43,000.
• Equipment with a book value of $30,000 was
destroyed during a freak flood in 2007. There was
no insurance.
• Martin owns 25% of the common stock of another
company and uses the equity method to account for
this investment.
Direct Method
Additional Information
•Martin’s tax rate is 40%.
•The Notes Payable to the bank carry a 12% rate.The
payments are due on the first day of each month.
•The Bonds Payable carry a 9% rate. Interest is
payable semiannually on July 1 & Jan. 1.
•Sold stock during 2007 for $50,000.
•Received $10,000 dividends from its equity
investment.
Direct Method
Cash Received from Customers

Sales Revenues $ 800,000

Less: Increase in A/R (8,000)
Cash Received from Customers $ 792,000

Cash Paid to Employees

Salary Expense $ 80,000

2000
Add: Decrease in Salary Payable 2,000
Cash Paid to Employees $ 82,000
Direct Method
Cash Paid for Inventory
Cost of Goods Sold $ 560,000
Add : Decrease in A/P 3,000
Less: Decrease in Inventory (30,000)
Cash Paid for Inventory $ 533,000

Cash Paid for Interest

Interest Expense $ 28,050

2000
Add: Decrease in Interest Payable 4,600
Cash Paid for Interest $ 32,650
Direct Method
Cash Paid for Taxes
Income Tax Expense $ 27,980
2000
Add: Decrease in Taxes Payable 3,000
Cash Paid for Taxes $ 30,980

Other Operating Cash Flows

Add : Dividends from Tiny Co. $ 10,000
Less: Purchase of Trading Securities (25,000)
Less: Other Operating Expenses (71,000)
Cash Flow from Other Sources $ (86,000)
Direct Method
Cash Flows From Operating Activities
Cash Received from Customers $ 792,000
Cash Paid to Employees (82,000)
Cash Paid for Inventory (533,000)
Cash Paid for Interest (32,650)
Cash Paid for Taxes (30,980)
Cash Paid to Other Sources (86,000)

Cash From Operating Activities $ 27,370

 Martin Co.
EquipmentStatement of value
with a book Cash Flows
of
For the Period Ending December 31, 2007
$40,000 was sold for $43,000.
Operating Cash Flows $ 27,370
Bonds
Investing CashPayable
Flows decreased
from $250,000 to $150,000
Proceeds from sale of Equipment 43,000
during 2007.
Financing Cash Flows
Proceeds from sale of Stock $ 50,000
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period $ 10,370
Add: Beginning CashNotes
Balance
Payable 60,000
Ending Cash Balancedecreased from $ 70,370
$70,000 to $60,000
during 2007.
 Martin Co.
Statement of Cash Flows
For the Period Ending December 31, 2007
Notice that the Ending
Operating Cash Flows $ 27,370
Cash Balance per the
Investing Cash Flows
Statement of Cash Flows
Proceeds from sale of Equipment
agrees with the 12/31/07 43,000
Financing Cash Flows
Cash balance on the
Proceeds from saleBalance
of Stock Sheet.
$ 50,000
Principal paid on Bonds (100,000)
Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period $ 10,370
Add: Beginning Cash Balance 60,000
Ending Cash Balance $ 70,370