 Hello, and welcome to this session in which we would look at the consolidated statement of cash flows. Now prior knowledge for this session is basically the statement of cash flows, how to prepare a statement of cash flows, because in this session we're not preparing a regular statement of cash flows, it is a statement of cash flows, but we're going to be preparing the consolidated. It's basically a consolidation process is occurring, now prepare the statement of cash flows. What is the statement of cash flows? It's basically a reconcile a cruel accounting to cash accounting. Remember we have two methods, we have the indirect method and we have the direct method. In the indirect method we start with net income, so basically we start with net income, then we prepare certain reconciliation to come up to cash flows from operating, then the direct method, what we do is for the direct method, we look at the income statement and we look at each line separately and we'll try to convert each line into its cash source, whether it's cash paid or cash received. That's the difference and the direct and the indirect method only applies to the operating section. Now in the U.S., we only, most companies not only, 99% of company uses the indirect method. Now if you did use the direct method, you still have to supplement with the indirect method. The first thing you need to know and I'm going to repeat this few times as we go along is consolidated statement of cash flows is prepared from the consolidated financial statement, not from the individual companies, so no elimination is necessary. Now there's like basically two types of consolidated statement of cash flows, one when the acquisition takes place, which what we learned in this recording and subsequent to the acquisition it doesn't really matter, subsequent to the acquisition there is not much really to do, we don't have to make any adjustments. Therefore at the beginning the first year we have to be aware of few adjustments. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead start your free trial today, no obligation, no credit card required. One we already talked about, consolidated net income is the starting point, consolidated. Also intercompany transfers, sales, purchases, receivable, payable, anything related to intercompany is already eliminated because we are dealing with the consolidated financial statement. So we are only reflecting post acquisition amount for that period. For example, any receivable, any inventory, any prepaid, any activities, accounts payable, pre acquisition will have to be removed from the computing of operating income. Access fair value amortization only reflect also post acquisition. From an investing perspective, we have to be aware that cash paid to buy the company is an investing activity. However, we only have to account for the net cash, not the full amount. So simply put, if we pay $100,000 to acquire a company and that company, they already have endure account $30,000 in cash. So the sub has 30,000. Well, our net cash outflow for investing is only 70. We paid 100, but we got 30,000. Therefore, our net cash outflow is 70,000. Also, we have to be aware about dividend. Dividend is a financing activity. How to account for dividend? Only we account for the non-controlling interest. So if we purchase 90% of a company, it means we don't own 10%. So if this company paid $1,000 in dividend, if the subsidiary paid $1,000, $900 is ours. There's nothing we need to do about. The only thing that we have to account for is the $100 of dividend that is paid to who, to the non-controlling interest. Now, the best way to illustrate this is to actually look at an example, at a comprehensive example. So let's take a look at this example, starting with the balance sheet of the parent company right here, then the balance sheet of the consolidated plus the parent company at the end of the year. So we are giving the balance sheet as of the beginning of the year of the parent company by itself before the consolidation, then the consolidated figures as of 1231 X1. We are also giving the consolidated net income as of 1231 20 X1. We are also giving the subsidiary balance sheet when we purchase the subsidiary. We are giving the book value and the book value amounted to 750 and we are giving the fair value, the fair value amounted to 860. Now we purchased 90% of this company for 774. So if we take 860 times 0.9, 860,000 times 0.9 times 0.9, we come up with 774,000. Now obviously the NCI, in case you're interested, it's 86,000 which is 10%. During the year, the parent company paid 55 in dividend and the sub paid at 25. Remember what I told you about the sub? Of that 25, 90% for the cash flow we don't account for, we only take into account 10%. So make a note of this, we're going to see this 10% which is 2,500 later. Just make a note of this, that only 10% will be listed on the statement of cash flow under the financing section. The parent company issued 514,000 in notes payable which is it's reflected here. If we see the difference between 532 minus 18,000, we issued 514,000 but we are giving this information again. Now the excess fair value over book value is obviously right here 110 and how are we going to allocate this 110? 15,000 to the land, the land is 15,000 in access, 40,000 to the equipment from 259 to 999 and the franchise went from 0 to 55. Now bear in mind that equipment and franchise are subject to depreciation and amortization and that depreciation and amortization is post acquisition. So we account for those post acquisition. So this is the balance sheet, this is the cash flow. Now before we start to prepare the statement of cash flow, we have to make certain adjustment to the operating accounts like account receivable, inventory, accounts payable. Simply put, we started with 118,000, we end up with 324, but that 324 included both parent and subsidiary. So we have to make the necessary adjustment to see what's the difference in the account post acquisition. So we're going to look at the beginning, account receivable 118, then we added the fair value of the receivable plus 145 equal to 263. Now the consolidated figure is 324. It means there was an additional 61,000 of account receivable. So the consolidated, so what we do is we compare the consolidated to the adjusted and there was an increase, a account receivable increase by 61,000. This means that's a negative cash flow for operating of 61,000 inventory. We started the inventory, the company by itself at 310. We added the inventory, but from the subsidiary 90,000, the adjusted is 400,000 for the consolidated once all said and done, we had 395. Therefore inventory, it's an asset, went up, went up 5,000, I'm sorry, I apologize, inventory went down 5,000. It means from a cash flow perspective, that's a positive cash flow perspective of 5,000. Now if you don't know this relationship, that's why you have to go back to the cash flow statement in my intermediate accounting or financial accounting to learn about this because the assumption here, as you know, that relationship when account when a current asset goes up, it's a negative cash flow. When a current asset goes down like inventory, it's a positive to cash flow. Now let's look at liabilities. We started with the year alone, the company by itself 52,000. We acquired the liability of the other company, 52 plus 15 equal to 67. We end up with 32,000 on the consolidated 67 and went down to 32. It means accounts payable went down. Why would your accounts payable went down? It means you paid it. So if your accounts payable, the change went up, it's a positive to cash flow. So liabilities, if current liabilities goes up, it's a positive cash flow. If current liabilities goes down, it's a negative cash flow. Now I need 15, 20 minutes to explain this. I assume you know what otherwise this is the relationship. So if liabilities went down, it's a negative to cash flow. It's a negative 35,000. What we did is I find the cash flow adjustment for the operating section. Now I am ready to prepare the statement of cash flows. I'm starting with consolidated net income coming from the income statement 486,500. Then I will add non-cash expenses, the 134 and the 4,000. And remember those two would reflect the additional depreciation, the additional amortization of the franchise agreement of the equipment. Then I told you account receivable net of acquisition increase in account receivable net of acquisition went up by 61. That's negative decrease of inventory net of acquisition. It's a plus 5,000. Remember decrease is positive to cash decrease of accounts payable. This is a liability. Well, if it's a decrease to accounts payable, that's a negative. Overall, if we net them out, it's plus 47. So 486,500 plus 47 will give us net cash from operating activities of 533,500. So this is the first section of the statement of cash flow, which is 486,500 plus 47,000, which is 533,500. Now let's look at the investing section. We purchased the sub. Well, we paid 774 for the sub. However, the sub had $35,000 in cash on their balance sheet. Therefore, the net cash between the two companies is only 739, because also we paid them 774. Immediately they gave us 35. The net cash outflow is net cash to use in investing 739. If we look under the financing section, we have the issuance of that, which was given to us 519, and we could also look at the balance sheet and see it. And we have dividend paid 57,500. How the dividend is 55,700? The parent paid 55,000, which is, it's accounted for 100% plus 10% of the sub-dividend. 10% of the sub-dividend is 2,500. Remember, I told you we're going to see this number again. Therefore, the total financing paid in terms of dividend is 57,500. Net cash provided by financing is 456. Now we add them up. We net operating financing and investing, increasing cash of 251. Let's see if this makes sense. If we go back to the balance sheet and we want to make sure that there was an increase of 251 in the cash position overall. So if we started with 150 minus or 401 minus 150 will give us a difference of 251, which is cash did increase by 251. And we did account for that cash of 251. What should you do now? The statement of cash flows is extremely important. Now, students find difficulty in their financial accounting and intermediate accounting about this topic. Well, advanced accounting, it's going to be more advanced. What should you do? Go to far half lectures and look at additional resources that's going to help you understand and master this topic. Good luck, study hard. 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