 In this presentation, we will continue to construct our statement of cash flows using the direct method. What we've done so far is take our information on the left, the comparative balance sheet, the income statement, and some added information. Support a counting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. We made our worksheet comparing out the current period and the prior period, mainly looking at these differences column, used that in order to construct a preliminary statement of cash flows, one that is in balance here in that it's in balance in that we tie out to our ending cash. And that's what we're that's what's going to tie out to the other financial statements. That's what gives us some indication that we're correct in a similar way as the balance sheet being in balance or a double entry accounting system. And all we did here is of course, think of this worksheet and rearrange these numbers to do that. Now in the process of doing this to just put this puzzle together, we refused to complicate the puzzle beyond just the differences here so that we can put something together that will work without muddying the waters and getting into a situation where we can't move forward where we don't know what's wrong. So right now we're we're in a situation where it works, we're in balance. However, we're too simplified in some of these areas, we grouped in some of these accounts into one number and we're recognizing that there's an error there, there's a problem, we're going to have to have more detail with that. So now we're going to go back and we're going to change these numbers. Now in a book problem, they're going to give you added information, which will typically be about these numbers in a in practice, we would of course just know that these are typically things that we're going to have to dig down a little bit deeper on. For example, if there's a change in equipment, then that's probably more than one change. So that's probably one of the things that we're just going to note and say we're going to have to drill down and dig deeper on. But when we do the preliminary numbers, we didn't do that, we just put that difference here so that we can we can put something down that makes sense and then go back into it. The same is true for the notes payable, we're often have notes payable where we're going to say, Hey, this change in notes payable could be multiple notes, we could have done different things, we could have bought equipment with it. So we're going to have to look in those things. Now, luckily, those things aren't things that happen all the time. So we can go back into it and find the data and look into those those events and there shouldn't be too many of them. So what we're going to do is we're going to we're going to drill down on that data, we're going to go to our worksheet over here, we're going to look at the journal entries we're going to get from them. So kind of like if we were going to drill down down on the GL, the general ledger and look at the activity in these accounts, then figure out the related journal entry. And then we'll try to figure out kind of in a journal entry type format, what type of accounts on our statement of cash flow we can adjust to remain in balance, meaning if we have one account go up, we got to have another account go down because our system is in balance right now. So we'll we'll use a similar kind of adjusting type worksheet or adjusting process as we would for, for, you know, a normal debit and credit type of idea, a balancing idea to work from here. So let's go through that now. The first one's going to be the equipment account. We know that something else is happening with the equipment. Now, like in a book problem, we're going to have the data down here and in practice, we would we would drill down on the equipment, look at the general ledger, shouldn't be too much activity, unlike cash, which has activity happening all the time, looking at the GL would be overwhelming for an entire year. But if we look at the equipment, we're not going to be purchasing any equipment and paying or buying and selling equipment all that often. So whatever we find, we can find it, we can look at those journal entries, hopefully there's not too many of them and figure out what happened. Did we finance the equipment? Did we sell the equipment? Did we get money for the equipment and all that kind of stuff? So if we drill down on that here, we're going to say, here's our data. And we're going to say that the equipment, we had a sale of equipment, and we had a purchase of equipment. So we'll go through the sale first. Cash received was $26,050. The cost of the equipment was $51,000. It had related accumulated depreciation $22,850. So we can see if we figure out the book value of the equipment then $51,000 cost minus the accumulated depreciation $22,850. Then it was on the books and it had a book value of $21,50. We sold it for $26,000. There's going to be a loss. So the journal entry is going to be this. Is cash affected? Yes. We're going to debit cash. The equipment that's on the books, it's an asset. We got to take it off the books. We're going to credit the equipment for the cost of the equipment because that's what it's on the books for is $51,000. The accumulated depreciation related to it also needs to leave the books. So and this would all be in the GL. If we were looking at the GL in a book problem, we have to reconstruct it. If we had the GL, we might be able to see all this in terms of a journal entry or the transaction. The accumulated depreciation is on there with a credit. We're going to take it off by debiting it. And then the difference here is going to be the, in this case, loss on the sale. So I'm going to reconstruct that over here. We're going to say, okay, the journal entry must have looked something like this. We must have had cash. And they're saying the cash was $2650. And then I usually, let's say $26,050. And then the cash is good. And then the equipment went off the books. It's on the books as an asset. We got to do the opposite thing to it to go off the books. Now I'm going to construct this in a way that makes sense. I'm not going to put the debits and credits on the debits on top necessarily. I'm just going to make the journal entry in a way that makes the most sense for me to construct it. So I'm going to say the equipment went off the books of $51,000. And we have to always remember that when we sell equipment, there's related accumulated depreciation. So there's related accumulated depreciation, which I'm just going to abbreviate here. It's on the books as a credit. So we're going to debit it to make it go down $22,850. And then of course, this minus this is $28,150. That's going to be the book value. We only sold it for $26,50. So if we take all of this, then we have a $2,100 loss that we're going to have. We need to debit, in other words, the credit. As $51, the debits only add up to $48,9. We need to debit. I'm going to do that with our negative sum formula, negative sum of these cells. Okay. And then obviously, just to calculate it would be the $26,50 plus the $22,850 debits $48,9 minus the $51. Or you can think of it as that's a loss. Why? Because the book value is $51,000 minus $22,850. And we sold it for $26. So minus $26, there's a loss of $2,100. Also, we need to debit. And debits are like expenses on the income statement. They bring that income down. So it's a loss. So we're going to say loss. So that's one transaction. And now let's look at the other journal entry related to equipment. We found another item making up this difference here in the equipment account. The other item making up that difference says that we purchased equipment for $113,250. We paid only $43,250. And we financed the rest of it $70,000. So what's the journal entry there? We debit the equipment for $113,250. We credit the cash we paid of the $43,250. And then we credit the note. So we have this note involved. Notice that the note doesn't have any cash. We didn't get cash for the note we got equipment. So it's not really a cash flow thing. It's a non-cash transaction. So let's go back up here then and we're going to make that journal entry. The other thing we found in the equipment account, we said, well, equipment must have gone up for the sticker price of $113,250. And then we had cash that we paid, but we only paid crediting cash, making it go down $43,250. The difference then we financed increase in the liability. The liability went up $70,000. So these are the two journal entries related to all these red accounts we had over there. They're all combined and mushed together in these two kind of journal entries. So now we need to take these two journal entries and think about them in terms of our accounts over here. We've got these accounts. What are we going to do? We kind of lumped everything up in this cash paid for the purchase. So one thing we can do is we can say, well, we didn't just pay cash for the purchase. We actually received some cash. We received cash from the sale. So that's one thing we can think about here. We can say, well, this cash here is a cash inflow and it's for equipment for the sale of equipment. So that's one thing we need to break out. So what I'm going to do is I'm going to say, well, we know we need to break this out. And that needs to be an inflow. So part of this is actually an inflow. And so I'm just, I'm not having debits and credits. Now I'm going to say there's an increase now, an inflow of that 26, this 26 is going to go here. And then we're going to say, well, what else happened? We can say that the cash outflow should end up being 43,250. Now, if we think about that, we're going to say cash outflow should be 43,250. And that's going to be the cash paid here. So this number needs to go down. We're going to have to say 87,200 minus 40, what did I say, 43,250. It's got to go down by 43,950. That's one way to think about it. The other side of this, of course, is that, and if we look at that, we could say that, you know, it's got to go, it's got to go down by, by that. The other side of this is going to be the fact that there's a note here, a loan payable. So the loan payable, this long-term loan is the other factor we're going to have to use to kind of figure this out, because this note here, cash paid for long-term note, is that it should be paid. This is represented and received. So this is the other thing we're going to use to basically balance this out. So we could try to figure out, in other words, what did we actually pay? What should this number be? And if we look at our data, they're saying it should be 47,500. So if we look at all the actual payments on the note, we're going to say, well, they should add up to 47,500. So that's the other piece that we could use. We could say, well, that number should be 47,500 decrease minus what we have in there right now, which is going to be 22,500 increase. So we got to make this, we got to flip it. So I'm going to add those two up. So we'll say plus 22,500, and that's 70,000. And that's 70,000 looks familiar, because that's this 70,000 here. We can say that this cash we used to pay to purchase equipment, this number here, we know what the actual payment should be. So we could say, well, we know that this number needs to go down. And so we're going to kind of increase that number. It's a negative number there. So we're going to put it on the increase side. And what we have in there is this number 87,2. And we know that it should be minus this number. It should be the cash that we paid 43,250. And that's going to be the 43,950. I'm going to flip the sign by putting a negative in front of it and then brackets around it. I have to use brackets or else it's going to say negative this number minus this number. So I'm just taking those two numbers and flipping the sign. So that's going to be the 43. Or we could have said that this long-term note payable down here, which is kind of like the difference now. This long-term note payable that we had needs to be adjusted as we calculated before. This long-term note payable by the 70,000 to bring it to the actual payments that we know we made on it. So I'm going to copy this and we're going to scroll back over here and paste this here. Do that. And that's going to be the credit of the 70. Now we could put the 70 there or we could put like it's a negative sum of these numbers kind of like a journal entry. So that's what we need here. Now you might be asking how would I know that that's 70? I mean we could see the 70 here from this problem. We would have to figure it out that it's from here. In practice you could try to figure that out. We also said that this number they gave to us in the problem, right? They gave us the fact that this is the amount that we paid to reduce the long-term note. Now of course we would have the, in practice we would have the actual payments. We can look and say what the payments were on the note. We'd have the amortization table and we would know what that number should be. So that's where kind of that number would be in practice. Okay, so if we do that then I'm going to put this information into our little worksheet over here. Notice there's an equal number of increases or decreases so that our adjustments should be the same. We should not leave the fact that we are in balance here. We are at the number we need to be at the end of the day. So we're going to have an equal number of increases and decreases in other words. So we're going to go to this items, the 87200 and I'm going to be in this column. So this is going to be the cash paid for purchase of equipment. I'm in like the adjustment column. This is kind of like an adjusted trial balance. And what we're going to do is adjust this cash paid for purchases, kind of like we would with a journal entry. So we're going to be in this J9 and say equals. And I'm going to scroll back over here and we're going to pick this number up, this 43950. And then I'm just going to make an adjusted column which is just going to sum up these columns. So we're going to say that this column, the adjusted cash flow is going to equal the prior number plus this number. So that brings us to 43250 which is what should be on our data. That was the cash paid for the equipment. So this is our correct number. If we go to our data, if I go to the left and go all the way down to our data, the actual cash that we paid for equipment was 43250. So that looks good. So now we're going to go to the next component, we're going to say that we had the cash received now for the equipment. And that's going to be, so I'm in J10. Within J10 we will say equals. And we're going to bring our cursor over here and say that 2650 was received. And then again, if we add those up, I'm going to say this equals what we had before nothing plus this number, what was received. This 2650 now represents what was received. So if we go back to our data over here, we could say, okay, that ties out to what was received in terms of the 2650 when we sold the equipment. And then we're just going to say that the other side is going to go to the cash paid for the note. So let's go to the cash paid for the note. That's going to be here. So we're going to be in this adjusting column. So here in J14 equals, we'll scroll back over, we'll pick up that 70. And then if we add these two up, this equals to 2250 plus the 70, 4750. That should be the actual payments we made on the note. That's the cash paid for the note. So if we scroll back over here, and we scroll back down, they're going to give us that data. So we can check that number say, okay, that paid for the note 4750. So now what I'm going to do is just bring over all the rest of the numbers. There's no other adjustments that we're going to deal with that should fix the note payable issue to be correct and all of our issues with the equipment. So to do this, I'm just going to pull over the same kind of formula. Now it's a little tricky because we brought this number to the outside. It might be easier if you brought these subtotals inside, but we're just going to pull over these numbers. So I'm just going to say this equals this number. And again, just to keep the formula the same, sorry, you're going to say it over here, this number equals this number. I'm just going to say plus this number to keep the formula the same all the way down, even though there's nothing here. If there were, you know, we would pick up these adjustments. And I'll just do this all the way down. This is this number plus this number we could, and this is going to be equal to this number plus this number. This equals this number plus this number. And then we'll just sum them out to the side. Again, I could do the same thing here and say this number plus this number, but I don't want to use the subtotals. I want to sum them up again so that we don't have to have those subtotals in our worksheet here. So I'll just sum this up again equals the sum of these items. And then we'll do the same thing here. We've done that here. We've done that here. Now I'm just going to sum them up. Now I'm not going to, I'm not going to, if I did pick up the same formula, this number plus this number, it would, it would not be correct, right? We have to sum up these two because the adjustment happened here. So we got to make sure we sum up these two and not pull over this number, because this is the subcategory. So this equals the sum of these two numbers. And that's been adjusted now. And now we'll do the same thing all the way down here. We're going to say this number equals this plus this. This is already there. This number equals this plus this. This number equals this plus this. And again, we could copy that down obviously. I could have, if I delete this, we could put our cursor there, auto fill, copy it down. Okay, then we're going to sum this up. I'm going to sum up these items. So equals the sum of these items. So I'm not going to pull over this number. We're just going to sum it up. And then we need to, we need to sum up the vertical column. Again, I can't pull over this number because we've recalculated it. This is going to be the net increase, which is going to be the sum of these numbers. So we're going to be out here equals the sum of the outer column. And then the beginning balance is the same. This number doesn't change. It is what it is. Whatever it was last year is what it is. This is the change we were looking for. It's the same number because we're going to get to the same number, but just make sure we don't do that by pulling this number over. Otherwise we don't have a good check figure because it should be the sum of these numbers. So this will be the same. And then the math on this one will be the same. Again, we want to add up these two, even though it's going to be the same number. We want to say equals the sum of these two. And that'll give us a check. So you can see that it's kind of like a trial balance. But because we still have these subcategories, we're going to have to be careful when you get to these subcategories. We have this adjusting column. But because it's in a plus and minus format and has these subcategories, we got to be careful when we pull these over. This then is going to be our adjusted trial balance. So here's what we had before. So this is what we had before. This is our adjustment. And then we just, this is our ending numbers then. So what we need to do now is if I don't want to see all the junk that put us in place to get there, is I'm just going to hide these cells. I'm going to put my cursor on H column to J column, let go, select those highlighted cells or those selected cells, right click, and we'll just hide those. And there we have it. Now again, this is still kind of a worksheet because we could go through here and clean up any terms and whatnot and change the terms to be cash inflows and outflows. But this will give us a worksheet. And the idea here is to kind of go through a systematic way to get to these numbers in such a way that if we run into a problem, we don't have to basically start all over. If we go to a supervisor or an instructor and ask about it, we can say here's where we're at and start from that point going forward rather than starting all over again. Major pieces, of course, being that this is going to be our, these are our flows, cash flows from operating activities, cash flows from investing activities, financing activities. This is the major number we're getting to, the change, which should match our worksheet, but we don't want to try out to the worksheet and we don't want to make our, you know, readers go through any math, any more math than they have to. So we're going to, so in other words, we don't want them to have to do the subtraction to know the change. What we're going to do is tie out to this number by doing the math, that little addition for them. So we're going to take this number plus this number equals what's on the balance sheet. So here's our change plus the beginning of the year equals what's on the balance sheet.