 Hello and welcome to this session. This is Professor Farhad in which we will work a statement of cash flows using the indirect method. To prepare the statement of cash flows, you will need an income statement, you will need a comparative balance sheet, two years of balance sheet, and you might need additional information, which we are giving in this exercise. So here's what we are told. One, a fully depreciated plant asset, which originally cost 20,000, had no salvage value, was sold for 1,000. Well, if that's the case, if it was fully depreciated, it means they have a gain of 1,000. Why? Because the book value for that asset was zero. Bond spable were issued at par. Two-thirds of the bond spable were exchanged for land. If we look here at our land account, we see it went from zero to 86, but it looks like it was purchased via a bond spable. The remaining of the bond was issued for cash. That's good information. Common stock was sold for cash. We went from 250 and I'm going to make this number of common stock to 85, 275. The only entries in retained earnings accounts are for dividend paid and the amount of 10,000. We paid dividend for 10,000 and net income for the year also affected retained earnings. A normal depreciation expense was recorded during the year and the franchise was amortized. Now we are told to do what? To prepare the statement of cash flows using the indirect method. Again, this number is 285. We'll get to it. Well, how do we prepare the statement of cash flow using the indirect method? We will start with net income because that's the purpose. It's to start with net income and prepare all the adjustments. What adjustments do we make? Well, we want to find out if we have any non-cash expenses at them back. We do. We do have depreciation. However, depreciation is not a separate line. If it was a separate line, if depreciation expense was given as a separate line, it would have been easy. I'll just add this amount. Well, it's not. It's part of operating expenses. What do I have to do now? I have to find out how much depreciation was taking. I made this exercise a little bit challenging because that's what you want to do. You want to know how to analyze account. We're looking at an account called accumulated depreciation with the beginning balance of 80 and an ending balance of 80. I'm sorry. The beginning balance was 86 and an ending balance of 80. It's a little bit unusual. It's not very unusual, but usually accumulated depreciation by its name. It should go up. Well, why did it go down? Well, we are told that we sold an asset that was fully depreciated for 20,000. If you remember note one, well, that explains why it went down by 20. Well, it went down by 20. It started at 86. It went down by 20. That's 66. It ended up to be 80. It means I can imply that my depreciation expense must have been 14,000 for it to balance. Therefore, I will add back my depreciation expense. 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. What else do I have to do? I have to analyze my franchise because I was told the franchise was amortized. It went from 32 to 24. Well, it means I took an amortization of a thousand. That's the difference. That's how much it went down by. I'm not giving any other information to worry about. Also, on the income statement, clearly I'm giving the entry that I sold an asset. I was giving the information that I sold the plant asset. I was not told the gain, but the gain is here. What do I do with the gain? I subtract the gain. Now, why do I subtract the gain? It's worth taking a minute, although I explained this in the tales in the explanation, but it's worth taking a minute. When I sold this asset, I received cash of a thousand dollars. Accumulated depreciation of this asset was removed for 20. The plant asset was removed also for 20. I booked the gain of a thousand. This was the entry. This is the gain that went on the income statement. The gain is not cash. The cash is the thousand dollar. The cash will be accounted for somewhere else. If I sold the plant asset, that's a financing activity. Therefore, the gain is a deduction. Now, I'm going to analyze current assets and current liabilities to find out how do they affect my operating section. I see that a count receivable went from 74 to 79. It means a count receivable went up by five. Well, that means it's a deduction from my cash. It means 5,000 of my sales, 5,000 sitting here is accrual sales, accrual sales. Therefore, if it's accrual sales, I have to take it out. Inventory went from 118 to 124. What does that mean? Well, if I'm buying more inventory, it means I am spending money on my operation. It's a deduction. So, notice every time a current asset goes up, other than cash, obviously your cash flow is negative. And the classic example is prepaid. Prepaid went from five to six. How do you acquire prepaid? You pay for them. So, if your current asset of prepaid going up, your cash is going down, negative. So, that's minus. And obviously, the opposite would have been true if current assets are going down. It means you are using your current asset. It will be a positive cash flow. Now, let's take a look at the liabilities. Accounts payable went from 41 to 53. If accounts payable went up, it means we are using our liabilities to operate. It means we are not paying cash. Therefore, it's an increase 12,000. Now, I net them, they net out to 21,000, all those adjustments. I will take my net income plus the 21,000 equal to my net cash provided by operating. Simply put, what I did is I took my accrual net income and convert it to what I called cash net income of 47,000. I'm done with one section of the statement of cash flow. Well, let's take a look at the next section. The next section is the investing section. What's the investing section? It appears that we sold an asset, a plant asset of 1,000. That's easy. We sold an asset. We received cash. Also, if we look at our plan asset account, let's take a look at that account. If we look at our plan asset, it went from 224 to 279, although we sold plant asset. We must bought something. We must bought plant asset. Let's see if we can analyze this account. If we look at our plant asset account, plant asset, it started at 224. It went up to 279. That's what I'm giving on the balance sheet. I was also told from note one that I sold a plant asset of 20,000. Well, if I take 224 minus 20, it doesn't give me 279. What I need is to add 75,000. This tells me that I purchased 75,000 worth of plant asset. Well, what does that mean? It's going to be minus 74 purchase of plant asset as a result. Net cash used by investing is 74,000. My next section is the financing section, and I'm going to start with the easy part. We were told that common stock was issued for cash. Well, if we look at common stock, it went from 250 to 285. Well, if that's the case, I received 35,000 in cash. That's easy. I was also told that I sold bonds payable, but two-third of it went for the land, which is I told you at the beginning, and the remaining was for cash. Let's see how much I issued in bonds. My bonds went from zero to 129. If I take the 129, I have to split. Two-third of it is land, one-third is cash, and I'm concerned with the cash amount. So the one-third is cash. Whatever that amount is the cash that I received, which is 129 times one-third is 43,000. Well, let's keep going with the easy part. Dividend is 10,000. I paid dividend. The last thing I did not analyze as far as financing is notes payable. Notes payable went from 58, I'm sorry, went from 63 to 58. Well, what does that mean? I paid down my notes. Therefore, it's a negative. It's a minus. And my net cash provided by financing is 63,000. Now I have the second section and the third section done. Let's take a look at the complete cash flow statement. This is the operating section and we brought in cash. This is the investing section. We spent cash, and this is the financing section we brought in cash of 63,000. Now I net them plus 24, minus 74, plus 63. I have a net increase of 36. Well, if I take my net increase and add it to my beginning, would it give me my ending? And it does. And my ending cash is 98,000, which means my cash flow balances. Now I also have to disclose the notes, the bonds that I issued to purchase the land because the investors and the users are going to say that I have land, but I did not account anywhere for it here. Well, it's because I purchased it issuing bonds. This is called the non-cash investing slash financing because part of it is financing, part of it is investing. Financing is the bond. Investing is the land. I will disclose a purchase of land through the issuance of stocks. And this is basically the complete cash flow statement. I highly doubt it. You'll have to complete a complete one on the exam. But if you understand this example, you should be good to go. What should you do now? Go to Fahat lectures and work multiple choice through false work additional exercises that's going to help you do better. Good luck, study hard, stay safe and stay motivated.