 In this presentation we will continue constructing our statement of cash flows using the direct method. What we've done so far is take our information on the left side including a comparative balance sheet. Support accounting 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. A income statement and some added information create our worksheet our primary tool that we will be using to create the statement of cash flows. We ended up with this difference column this is where we are concentrating now we're going to find a home for all of these differences once we do so we'll come up to the difference in cash ninety one thousand uh nine sixty one thousand nine hundred and we've done so so far with the operating activities and investing activities we've highlighted and kind of made a nice colorful picture here as we have done so and now we're going to go to the financing activities so moving to the financing activities we're basically just going to look for these last kind of items and find a home for these items as we go so the next one's going to be here the short term notes payable now that now we know we're already kind of indicating that it's going to go into financing but and you might just think well anything related to a note is pretty much going to be financing but if you go through our thought process you would say well what's the journal entry related to notes we're going to when we get the note we're going to debit cash we're going to credit uh notes payable typically again no income statement account involved so it's not really an operating activity which is kind of our default assumption usually we didn't now we didn't buy anything with a note typically if we note if we just got cash with it and so it's not going to be an investing activity and you might start to think well what if we did buy something with it what if we bought equipment with it and uh and we credited uh uh the note and we debited the cash we and we bought it so wouldn't that be an investment and you're right there it would kind of be an investment but note that in that case there was no cash involved we we bought a piece of equipment and financed it there's no cash involved so if that's the case we're going to have to dig down in here and kind of remove it from the cash flow because there was no cash flow we just purchased equipment with it so uh just note in that case we're going to have to fix these again these accounts we'll have to uh dig down into in practice we'll kind of assume make the assumption based on the little information we have here and then we'll dig back down look at the gl and look at the few transactions that should be related to these notes there shouldn't be a lot of activity there should be we took a few loans out and we paid back interest it's not like again it's not like cash where if we if we looked at the gl account for cash it would be like we'd be very overwhelmed because there'd be activity all over the place probably if we look at the gl account for notes payable long-term and short-term notes payable there shouldn't be too much activity so we'll go back in there look at the detail right now we're just going to assume that uh that we borrowed money or paid money for these differences so and that means that there's no there's no uh income statement account and so it's not operating we didn't buy anything we're financing the company we're getting cash to finance the company so it's not going to be investing and therefore it's going to be a financing activity when we pay back the interest you might ask you might say well interest expense is an operating activity but again it's not like the primary thing interest expenses isn't the primary part of the journal tree so to get the primary thing is to get to finance the company that's what the cash flow here's typically going to be so here we go so we're going to say that the cash went from 10 000 to 15 so it went up and if it's a note payable then if the note payable went up our assumption then is that we borrowed money we got cash so for us that would be a cash inflow so we're going to say borrowed money i'm going to say just like we do with all of it negative of that number and of course that makes sense because i'm flipping it from a credit to a positive number because we're assuming that cash came into the country that's the company this time because we got a loan again we don't know that for sure and we're going to have to check that in practice i would check that but i'm not even going to go into the detail right now because i don't want to know the detail right now we just want to finish the cash flow statement and get to this number and then check those items that we know we need to go check so i'm going to make this just a different color to indicate that we found a home for that so we'll make all the rest of them how about this color here so and i'm just going to use the same color for the rest of them here because they shouldn't be we should be able to find a home for them without too much complication so without having to combine things in other words okay so then we have the long-term note payable same argument so here it went from 77 five uh up so you would think again we borrowed more money so i'm actually gonna i know that we actually flipped it so i'm gonna use the term saying cash paid because even though i'm here i would assume we borrowed money but i know we actually paid money because we financed the equipment so i know again i know that this number there's more detail than is here we're gonna have to deal with this equipment up top to deal with it so although just from this information i could say that it looks like uh we borrowed money i'm just going to put cash paid because i know that's what actually happened and once we make the adjustment we will make that adjustment we i could put we borrowed money and then change the the wording later but i'm just going to put it here that says we can't we paid cash again i know that this number is wrong but it doesn't make sense for us to break it out right now it doesn't make sense for us to get into the detail and start breaking this out and complicating the puzzle when we could just solve this easy puzzle first to get to this number and then complicate things in a systematic way so that we can always you know be more confident that we're we're we're still in balance so i'm going to do the same thing here i'm just going to say negative of this number and there's that so we'll say we found a home for that one and then we've got common stock and paid in capital now these two what what has to what we have to assume here is if those change and they don't change all the time because that common stock would only change if we issued stock and that doesn't happen all the time stock is traded all the time on the stock exchange but it doesn't it's not always issued all the time by the company any new stock that's issued by the company means that basically if they're looking for an investment by the owners so this would be an investment in the owners the only tricky thing here is that these two are we're basically going to combine why is that because if we sell the stock at a par value that means that what's the journal entry we would get cash for whatever we could sell it for the market price we would credit common stock for the par value which is some stated value typically less than the market price and then we would sell the difference would go to paid in capital so these two both the cash flows represent to represent investment in the company now this would be similar to if we're talking about like an owner who put money in the company of a sole proprietorship or partnership in that case the the capital account would go up and we would and we would debit cash and credit the capital account so if you're working on a different type of entity just note that this would be similar to the owner putting money into the the company for a capital account and note if you go through our questions it's not an operating activity because there's no income statement account involved it's not an investment activity because we're not buying anything the company is not buying anything or the business is not to buy anything the individual is buying part of the company and buying stock but the company itself isn't buying anything the company is selling its own uh claim to its own value to its own future revenues and whatnot for investment for capital for money to finance so that's why it's going to be a financing activity okay so we're going to do the same thing over here I'm just going to put negative of this number minus this number same process which basically adds them up and makes it a positive because this is a cash inflow cash is going into the company so I'm going to say we found a home for those two and then we got the last one which is dividends and dividends here again we listed it out because we listed out all the temporary accounts as as uh so this is a temporary account so the dividends then it represent payment to the owners and they're similar to like a draw for uh a sole proprietorship or partnership so here we're going to say that means that cash must have gone out it's a financing activity because what's the journal entry it's going to be credit cash and debit dividends or retained earnings again no income statement account involved not operating the company didn't buy or sell any assets it's basically giving back value of the company to the owners and that's going to be part of financing so I'm going to put negative of this number flipping the sign this is an outflow here and there we have that so then we're going to sum this up because we found a home for everything now and hopefully we're in balance so we found a home for everything here this one we found a home down here and then everything else we found a home for so hopefully we're in balance I'm going to sum this up sum up the financing activities we can even underline it here if we want to underline and then equals the sum of these items and there we have that and then if we sum up this outer column we should get back to this number notice that this number is getting pulled from here I'm going to do it now by summing up the three components operating activities fund investing activities financing activities so let's sum up this outer column so I'm going to delete this equals the sum and double click the sum and highlight these three numbers that minus that plus that gives us the 61 9 and that matches what we have over here so here we have our cash flow statement is working it this number ties out to what we would what we would have on the difference now that's not the ending number on the cash flow statement because if we did that then the people reading the statement would have to do a little work meaning they'd have to take this comparative balance sheet we give them take the difference between them and figure out that the cash flow statement ties out to that if they wanted to check that but we don't want to make them do that much work so we what we do is we tie this out this is really what we're trying to get to but we tie it out to ending cash and the way we're going to do that is we're just going to list out these beginning numbers so this this is going to equal this number the cash on the prior balance sheet and then if we add those up that's going to equal the 123 450 the cash on the current balance sheet so then if someone wants to look at this they're going to say okay cash on the balance sheet that should match the cash flow bottom line number on the cash flow statement so that's just an easy tie out however this is really the number we care about because this is the change in cash this is what actually happened and this statement is a change statement so now what we want to do we found a home for all these but we noted we're going to have some problems here and the problems typically will happen in you know the investing activity and uh and financing activities so we know we're going to have to break out this number so next we're going to do that systematically we're going to have to say okay how can I systematically break this out without messing up the fact that my puzzle works right now and this can get complicated but note that what we have here is something that we can we have a good starting ground from if we go somewhere else if we go to like an instructor and say this is where I'm at I know exactly what the problem is we can we can list out exactly where we're at instead of starting over if we're in practice same thing we can say hey this is where we're at I know I need to do something here I know I'm in balance now how do I break this out to remain in balance and whatnot and we have a starting point to go through without just kind of starting over so that's going to be the argument of using a method like this