Preparing a Statement of Cash Flows

which one of the following items is not necessary in preparing a statement of cash flows? This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you Preparing a Statement of Cash Flows. Following along are instructions in the video below:

“This video. We re actually going to look at the process of preparing a statement statement of cash flows. So let s first talk about the four steps really the four steps that are involved in preparing a statement of cash flows. The first one is to look at the first section of the statement of cash flows.

Which is the operating activities section. And this section can actually be created using one of two methods. One is the direct method. One is the indirect method and this discussion.

We re going to focus mainly on the indirect method. The next step would be to compute the net cash provided or used by investing or financing activities. Then by summing those three sections the operating investing and financing activities. You will find a change in cash during the period.

Which should also be the difference in your beginning and ending cash from your balance sheet. So let s take a look at an actual statement of cash flows here we re gonna create one i m using this income statement from telemarketing inc and the balance sheet. Now you can see from the balance sheet. This looks like it s the first year of operations.

Because all of our balance sheet. Accounts started with a zero balance. And now. We have a balance in them at the end of the period or at the end of the year.

So to be able to create a statement of cash flows..

We want to change because we re analyzing each one of these accounts. So we need to change from beginning to end. So. That s why we have two sets of data.

Here and you can see in red. The actual change in these accounts. So whether they increased or decreased throughout the year. And it looks like all of these increased.

So that s very important to note when we get into the statement of cash flows and you can see the income statement here because we will need certain data out of the income statement. If it exists so let s start with our cash. Provided by operating activities and again. We re using the indirect method.

And we know that because by looking at the operating activities section. Here on the statement of cash flows. We are starting with net income that s a clear signal that this is that this statement of cash flows is created using the indirect method so we want to adjust again remember the operating activities section. We are analyzing all the current assets all the current liabilities.

Depreciation and gangs and losses. So that s what we need to look for so we ll start with our net income. So we bring the net income down into the statement of cash flows and now we re going to want to adjust again for all the current assets and all the current liabilities look for any depreciation and gains and losses well if we look at our income statement. We don t see any depreciation expense.

There and we don t see any gains and losses..

So i m gonna jump right to my current assets and the first one i see there we don t analyze cash itself in the operating. Activities section remember we re trying to see where that. 31000 change or 31000. Increase in cash came from so that s what the statement of cash flows is gonna show us so we skip over that account and we look for accounts receivable went from 0 to.

41 so it was a 40 1000. Increase. So we re gonna put that directly on our operating activities section of the statement of cash flows. Yeah as you can see here we are subtracting it from net income cuz think about what an increase in accounts receivable does we must have earned revenues.

Which again increased net income and we earned them on account because accounts receivable has increased well if we earn them on account that means. We haven t received the cash. So we need to subtract that from net income to get nit income from an accrual basis to a cash basis. So that s what we re doing this operating activity section.

Then the next thing. I see here that i m going to analyze not land because land is not a current asset. So we re gonna jump down to the current liabilities and we have one of them and it s accounts payable and we see that accounts payable increased from. 0 to 12000.

So that will be an increase on the statement of cash flows. Because would make accounts payable increase. Well for example you might have got a utility bill well a utility bill is an expense. Which reduced your net income.

But if it went on accounts payable or utilities payable or over the case may be then that did not effectively reduce cash..

So you have to add that back remember we re adjusting net income from the accrual basis back to cash basis. And then we can find our net. Cash provided by operating activities in this case because net income of 39000. Is higher than the adjustments to net income.

So we have net cash provided by operating activities is that if this were a negative number. It would be net cash used by operating activities. Our next step is to move from the operating activities section to the investing and financing activities section. So in the investing activities section.

We re going to analyze all of our long term assets. So we have one and its land and it looks like we our land went up so that means we purchased land that insinuates that cash went down so we re reducing that so it will be a negative number and we only had the 1. So this will be net cash used by investing activities in the cash flows from financing activities recall that we re analyzing all the long term liabilities and our stockholders equity accounts in this case. We do not have any long term liabilities.

So we re going to jump right to our equity and it looks like we issued common stock of 50000. So we will put that on our financing activities section. If we issue stock that means we are receiving cash. So that will be in addition to cash and if we look at our retained earnings and we ll talk about this in a.

Second but if we look at retained. Earnings it went from 0 to 25000. Now don t just assume that that is all net income or dividends or a certain amount remember you got to think about what affects retained earnings. There s two things that effect earnings net income and payment of any dividends.

So we started with zero retained earnings and we had net income of thirty nine thousand dollars..

But we ended the period not with thirty nine thousand with twenty five thousand so therefore how much did we pay in dividends. It would be the difference right so we pay fourteen thousand dollars in dividends. Which effectively reduces cash. Therefore our net cash provided by financing activities would be thirty six thousand dollars.

If we sum those three sections the ten thousand provided by operating the fifteen thousand used by investing in the thirty six thousand provided by financing. We will end up with a net increase in cash of thirty one thousand dollars. We started the period or the beginning of the year with zero therefore our cash at the end of the year on the balance sheet is thirty one thousand so it equals out so before we end our discussion on preparing the segment of cash flows. There s a couple of t accounts.

I want us to review. I want to look at property plant equipment net and retain earnings so let s start with property plant equipment net sometimes you won t see just property plant equipment you will see property plant equipment net that means it s net of depreciation. So depreciation has already come out so we need to recreate this t account. So that we can ultimately find how much property plant equipment were purchased during the year.

So we know if we have beginning and we have our ending and we know when our depreciation expense was for the period. Then we can find the purchases for the period. With simple math retained earnings the same way we just looked at this but let s recall retained earnings carries a credit balance. We know that net income increases retained earnings so beginning retained earnings plus net income minus you re ending retainer would give us our dividends for the period.

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