 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at a comprehensive example of a statement of cash flows, which is similar to a CPA simulation. This topic is covered in introductory accounting, intermediate accounting and definitely the CPA exam, the far section heavily covered. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance and tax lectures. This is a list of all my courses, including many CPA questions. If you like my lectures, please like them, share them, subscribe. If they benefit you, it means they might benefit other people. Share the wealth connect with me on Instagram. On my website, you will find additional resources such as true, false, multiple choice exercises such as this one. Plenty of resources to help you pass the CPA exam, add those 10 to 15 points to get through and put the exam behind you and focus on your career. If you would like to see the prerequisite, the explanation for the statement of cash flow, please check the description. Because in this session, I'm going to be working an exercise and I'm constantly going to tell you this is what we learned. This is what we learned in the prior sessions. So if you want to learn a little bit more, go to the description to go to the playlist. And this is the example that we're going to be working with. We have 14 company. We have their current year income statement. They have a profit. We have the comparative balance sheet, two year balance sheet. In addition to that, we have additional information for the year. All sales were on credit sales. All credit sales to account receivable reflect cash receipts from customers or purchases of inventory are on credit. All debit to accounts payable reflect cash payment for inventory. Other expenses are paid in advance and are initially debited to prepaid expense. So they told us what happened, you know, which what account affects what account. So what's required of us here is to prepare a statement of cash flow. We have the income statement, balance sheet and additional information. The best way to look at this is to use my one note application so I can point and highlight what I need to highlight. First, we need to complete the operating section. And by the way, I'm using the indirect method, not the direct method. We'll use the direct method. We'll learn about the direct method in a separate recording. So what are the steps in preparing the statement of cash flow operating section? Remember, I broke that section into five categories. So operating section. What are those five categories? One, start with net income or net loss in this situation. We have a net income to add add non cash expenses such as depreciation, amortization, but that expense. Three, add losses for the duct gains. In five, you have to analyze current assets and current liabilities. If current assets go up, it means your cash flow went down. If your current assets went down, it means your cash flow went up. They work in the opposite direction for your current liabilities. If your current liabilities went up, your cash flow went up. If your current liabilities went up, your cash flow. flow. I'm sorry, if your current liabilities went down, your cash flow went down as well. So those are the five steps. Let's go ahead and work on the five steps starting with net income. And we are giving net income as 114,975. So we will start with net income. At the end, I will show you the, you know, officially how you would look at it. But let's see it. 114,975. And basically we are done with step one. Net income is done. We're going to go to step two, add non-cash expenses. Now how do you find the non-cash expenses? You will scan the income statement. You will scan the income statement to find out if you have any non-cash expenses. We have cost of goods sold, operating expenses. There you go. Depreciation expense. We have depreciation expense of 20,750. Well, what do we do with 20,750? We are going to add depreciation expense of 20,750. And basically I'm done with step two. I added my non-cash expenses. I don't have anything else. I have other gains and losses. I have a loss. If I have a loss, I will add the loss. So I have a loss plus a loss of 51,25. So I'm done with step three. Let me, I look at my income statement. I have no gain. I'm done with the gain. Now I need to analyze my current assets and current liabilities and make the appropriate adjustments, whether I need to add or subtract. Starting with account receivable. I look my, my current year is 65,810. My prior year is 50,628. If I take the difference, I see that account receivable increased by 15,185. That was an increase. Well, an increase means if account receivable went up, it means I did not collect enough money. I sold more on credit of 15,185. Therefore, it's a deduction. Well, I need to analyze my inventory. So I'm done with my account receivable. My inventory went from 250,800 to 275,656. Also, that's an increase of 23,856. So if inventory went up, it means it's a negative cash flow of 23,856. So I'm done with inventory. My prepaid went from 18,1875 to 1250. My prepaid went down by 625. Well, if the prepaid went down, if the prepaid went down, that's a positive to cash flow at 625. When the prepaid goes down, what does it mean? Well, that doesn't have to be the prepaid, but specifically the prepaid, that's easy to explain this. When the prepaid goes down, it means I expensed, I expensed, I recorded accrued expenses from the prepaid. So I did not pay for the expenses. This year, I paid for the expenses from the prior year. Simply put, when I debited my expenses, I credited my prepaid. That's why my prepaid went down. So my expenses went up, my prepaid went down, versus if I debited my expenses and I credited cash, then my cash went down. So since I credited, I credited the prepaid, I conserved my cash. I did not, I did not, I did not spend cash. So therefore, prepaid went down, cash goes up. And I think I'm done with all the current assets. So I analyzed all the current assets. Okay, now let me look at my current liabilities. The only current liabilities I have is accounts pay, but I could have this or many, it doesn't matter. Accounts pay will went from 114.675 to 53,000. It went down. It went down by How did we get to the rainy day one? It went down by 61,000. Yes, it went down by 61,534. What does it mean when your, when your liabilities go down? When your liabilities go down, so accounts payable went down. It means I had to pay off the liabilities. So I paid off 61,534. And I'm done with the operating section. Basically, I analyze my current assets. I analyze my current liabilities. Now I'm ready to determine whether I had a positive cash flow. I have to determine what whether I have a cash flow, a plus or a minus. So let me go ahead and net them out to find whether I have a plus or a minus one moment please. And if I do my computation, I see it's positive 40,900. It means my cash, my cash is positive 40,900 versus a net income of 114.975. So simply put, my income statement shows 114.975, but in actuality the cash was 40,900. Now what could explain this huge difference? And by the way, accounts payable was a negative. What could explain that huge difference? Part of it is accounts payable. I made a huge payment on my accounts payable. I paid, I made a large payment on my accounts payable, which in turn reduced my cash. Okay. That's that's that's the main reason. So I'm done with the operating section. I'm done with the operating section. The next section is the investing section. So when I'm looking at my investing section, I need to focus on my long-term assets, which are right up, sorry, equipment right here, equipment. And if I have any investments, I happen not to have any investments. Therefore, I don't have to worry about it. Now always read the additional, I skipped the additional information because I did not need them for, I did not need them for this, but let me, let me, let me read the additional information. The loss on the cash sale equipment of 51.25 is in, look at point B. Point B, we sold the machine costing 46,875 with accumulated depreciation of 30,125 for 11,165. Let's kind of reconstruct what happened here. So we have a, we have, we had an equipment with an original cost of 46,875. And this equipment had accumulated depreciation related to it of 30,125. So this is, this is the asset that we got rid of. Now we were not told, we're actually, we were told that we sold it at a loss. Okay. And we are also told how much we sold it for. But let's do this computation to find out exactly what was, what was the book value to kind of confirm our, our loss. So 46,875 minus 30,125. The book value was 16,751. I think there's something wrong with the math. Let me do it again. 75, not 76. So it's 16,750. 16,750 was the book value. We sold it for 11,000. So this was the book value, the difference between the equipment and the accumulated depreciation. We sold it for 11,625. This is the cash. We received less than the book value of 5,125. So we know, we kind of proved to ourselves that, that, that sale was resulted in a, resulted in a loss. It's good to confirm yourself if you have time. Okay. Now also, so this is, this is one of the equipment. Also, what we are told, we purchased an equipment costing 96,375 by paying $30,000 cash and signing a note. We purchased another equipment. So we simply put from this equipment, we got rid of this equipment. When we got rid of this equipment, we had a positive cash. Okay. We had a positive cash of 5,125 from the first piece of equipment. In the second, in the second equipment, so we had an equipment and we purchased that equipment for 96,375. However, of this amount, only 30,000 was cash. And the remainder, which, which, which is the remainder, the remainder was a loan. So all we care about is we paid cash of 30,000. Okay. So simply put, it seems we accounted for all the activities. Actually, sorry, the cash for the sale was 11,625. The loss was 5,125. So cash was plus 11,625 for the sale of the first asset. And for the second asset, it was a minus of 30,000, 30,000. So simply put, if I want to complete my second section, now I'm looking at the, the second section, this is now the investing, investing section. I had cash received from the sale and it was 11,625. Cash paid for the cash paid to purchase the asset. Cash paid for the equipment was plus, I'm sorry, cash paid is negative, minus 30,000. And basically, I accounted for everything. Now, you always want to double check yourself. How do you double check yourself? Well, you look at your equipment account. This is good to double check yourself. And the beginning balance was 108. The ending balance was 157,500. Now, what you want to do, you want to plug in what you are giving. You were told you purchased an asset for 96,375. 96,375. And you sold an asset with the cost of 46,875. So it's always good to double check yourself, make sure you accounted for everything. Let's see if we did accounted for everything. We started with 108. We added 96,375. Then we got rid of an asset of 46,875. And this is 157,500. We accounted for everything. So practically, I can say I'm done with my investing section. And as a result, I paid. The difference is 18,375. 18,375. And that's what we called net cash used. So this is not cash used, not positive. It's negative. So for the operating, we had a positive operating for the investment, we had negative. Now we need to work on the third section. And the third section obviously is financing. So let's take a look at the financing section. Financing. Don't worry, I'm going to show you the complete solution at the end. The financing section, what am I looking for? I'm looking at my notes. I have a note here. Short-term note, long-term note, common stock, paid in capital, and retained earnings. Those are the accounts I need to analyze. In addition to that, I have to see if I have any additional notes. Well, we paid 50,125 cash to reduce our long-term notes payable. We borrowed 4,000 by signing a short-term note. We issued stocks for cash. That's easy. And we declared and paid it. So let's take it step by step, starting with short-term note. With short-term note, we went from 6,000, went from 6,000 to 10,000. Notice we went from 6 to 10. Well, it means we increased by 4,000. We increase our short-term notes by 4,000. What do we know about short-term notes? Right here, D, it says, clearly it says we borrowed $4,000 cash. So we're done with the short-term note because the numbers as well as the additional information confirm this. So cash borrowed on short-term basis, borrowed short-term plus 4,000. Now let's take a look at our long-term notes. We know the prior balance was 48,750. The current balance is 65,000. So let's restructure the T account for the long-term note to see what we make sure we accounted for everything. We have notes payable. The beginning balance was 48,750. The ending balance was 65,000. We know that we paid 50,125 to reduce the note. It means we paid 50,125 to reduce the note. 125 to reduce the note. This was cash. So if you want to, we can go down right now and say paid long-term note, cash paid for long-term notes payable. We paid that much for long-term notes payable, 50,125. We know that we paid that. We're already told in the problem and we need to restructure the T account. Now in addition to that, remember we purchased an asset. We purchased a piece of equipment costing 96,000. We paid 30,000 and the remaining was borrowing. So let's see how much we borrowed. So the total amount of the equipment was 96,375. We paid $30,000 in cash. What's left is 66,375. Let's see if we accounted for everything in the notes section. We started with 48,750. We added 66,375 to purchase the asset. Then we paid off 50,125 and we have 65,000. I accounted for everything. So I'm done with my notes. So I'm done with my short-term notes and I'm done with my long-term notes. Now I need to move to my common stock. My common stock went from 150,250,250 to those two numbers together because when you issue stocks, you should also pay in capital. Let's see what we are told about the stocks. It says we issued 2,500 shares at $20 per share. Well, let's see how much we should have received money. If we issued 2,500 shares times $20, the stocks should increase by 50,000. Well, let's see if that's the case. What's 162,750 plus 37,500, which is 2,200,250 minus 150,250. That's 50,000. Excellent. So everything makes sense. It means I issued, I sold more stocks worth of 50,000 and I received cash. It's clearly here. You sold all the stocks and you received cash. Well, I can go down right here to my financing section and I can put down issued or sold stocks, whatever you want to say or cash received, cash received from common stock. I'm just abbreviating cash received from common stocks and that's 50,000 plus. That's 50,000. So I'm done with my stocks. What's left is my retained earnings. What's left is my retained earnings and let me analyze my retained earnings. I started with 120,125 and I ended with 185. My net income right here, my net income was 114,975 and I was told I paid dividend of 50,100. 50,100. Well, let's see if this is the complete picture. If this is the complete picture, I'm practically done because I'm given everything. I just want to make sure it's correct. Let's see. I started my retained earnings with 120,125. I add my net income 114,975. Then I deduct my dividend 50,100. It's 185. Everything is accounted for. So simply put, my last component is cash paid for dividend and that was 50,100. Now I'm going to net out my financing suction. They net out to negative 46,225. So I got the third suction. Now what I need to do is this. I need to net all three sections. I need to net the operating, the financing, and the investing, all those three. And the net, if I net them all out, there was a net decrease. If I take those three figures and I net them out plus 40,900 minus 183.75 minus 46, that's a net decrease of 23,700. Now I need to know what's my beginning cash. My beginning cash, let me see, what's my beginning cash? My beginning cash was 73,500. My cash beginning 73,500. So my cash went down by 23,500. Is that equal to 49,800? Let's see. And that is equal to 49,800. Everything works. So simply put, my cash went down by 23,500 because the prior year was 47. This is cash ending. My cash this year is 49,800 because last year I had 73,000. My cash went down and the reason why my cash went down because of my financing and investing, especially my financing, I paid 46,000 and especially my dividend and my paying off my long-term note that really hammered my cash. So basically what I did is I went through the whole section. Now I want to show you the complete solution. So this way you see what it looks like on the Excel sheet, not on the Excel sheet on the PowerPoint. So this is what it looks like. So this is the operating section, financing, investing. We add it to the beginning cash. We'll get to the ending cash and this was the net change 23,700. And in the disclosure you put down that you had the non-cash investing and financing activity and you put that information down. Now if you like this recording, please like it. If you want to have access to additional material, please visit my website. Subscribe to the channel and if you're looking to get that extra 10 to 15 points on your CPA exam, I strongly suggest you check out my website for additional resources. You invest for your CPA once in your lifetime. Do it wisely. Good luck and stay safe during those coronavirus days.