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Chapter 13: Example of preparing cash flow statement

1. Converting Sales (services) revenues to Cash received from customersPlease indicate the impact being increase (+), decrease (-), or none (n/a).

Transactions Sales Revenue Cash received fromcustomers

Acc. Receivable

Cash sale + + NACredit sale + NA +Collection of A/R 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 abalance of $45,000 at 1/1/2005 and a balance of $52,000 at 12/31/2005. How much wasthe cash received from customers?

T-account method Accounts Receivable

BB 45,000 600,000 ? Cash collection EB 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 Purchase of inventory Cash paid to suppliers Acc. PayableCash purchase + + NACredit purchase + NA +

Payment of A/P NA +

Therefore: Purchase (+) Increase (decrease) in A/P = Cash paid to suppliersAlso, Beginning Inventory + Purchases COGS = Ending InventoryThus, Purchases = COGS +( ) increase in inventoryCash 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 abalance of $13,000 at 1/1/2004 and a balance of $13,600 at 12/31/2004. How much wasthe cash paid to suppliers?

T-account methodInventory

BB 12,000

Purchases? 20,000 EB 10,000


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Accounts Payable BB 13,000

Cash paid to vendors? Purchases of inventory

EB 13,600

Purchase =18,000The $600 increase in A/P indicates that cash paid to suppliers is less than purchase of inventoryby $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 at1/1/2003 and a balance of $10,000 at 12/31/2003. How much was cash paid to employees in year2003?

T-account method Salary Payable

35,000 BB

Cash paid to employees? 500,000

10,000 BB

The $25,000 decrease in salary payable indicates that cash paid to employees is more than salaryexpense 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 at1/1/2003 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

Cash paid for rent 12,000

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


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Following is the income statement for year ended on March 31 2008, and the balance sheet atMarch 31 2008.

Sales Revenue $2,600Expenses:

Cost of Goods Sold 800Depreciation Expense 300Insurance Expense 50Interest Expense 30Total Expenses (980)Net Income $ 1,420

3/31/08 3/31/07 Change 3/31/08 3/31/07 Change

Cash 6,895 6,495 200 Acct payable - 800 (800)

Acct. receivable 2,000 1,150 850 Other payable - 50 (50)

Inventory 500 100 400 Interest payable 30 - 30

Prepaid insurance 175 325 (150)Notes payable(long term) 3,000 1,000 2,000

Machine 4,000 - 4,000 Total Liabilities 3,030 1,850

Acc. Depr. (300) - (300) Common Stock 1,500 1,000 500

APIC 6,500 4,000 2500

Retained Earnings 2,240 1,220 1,020

Total Assets 13,270 8,070Tot. Liab.&S.E. 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 )

Required1. Provide the cash flow statement for the year using indirect method.


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Statement of Cash FlowsFor the Year Ended March 31, 2008

Cash flows from operating activities:Net income $1420

Adjustments to reconcile Net Income to net cash flows from operating activities + Depreciation expense 300 Increase in Acc. Receivable (850) Increase in Inventory (400)+ Prepaid insurance 150 Increase in Acc. Payable (800) Increase in Other payable (50)+ Decrease in Interest payable 30Net cash provided (used) by operating activities (200)Cash flows from investing activities: Cash paid for acquiring machine (1,000)Net cash provided (used) by investing activities (1,000)Cash flows from investing activities: Cash paid for principal on notes payable (1,000)Cash received from issuance of stock 3,000Cash paid for dividend (400)Net cash provided (used) by financing activities 1,600Net increase (decrease) in Cash & Cash Equivalents during 2008 400Cash at March 31, 2007 6,495Cash at March 31, 2008 6,895

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 companydid not sell any of the equipment. Thus, the change in equipment account corresponds to purchaseof machine. As mentioned, the cash used for the equipment costing 4,000 was only $1,000. Thenon-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 thechange in notes payable was only $2,000, the cash payment on principal was 2,000.

Cash received from issuance of stock 3,000The sum of increases in both common stock and APIC represents cash received from the issuanceof stock.

Cash paid for dividend (400)Retained earnings would have increased by net income of $1,420 if there was no dividend. Thusthe increase of $1,020 in retained earnings indicates that there was a cash dividend of $400.


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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/PPurchase= COGS + increase in inventory =800 +400 =1200Cash 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 tothe 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. Pleasework 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 tothe example on prepaid rent and rent expense)

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