 in this presentation we will take a look at the statement of cash flows using the direct method here's going to be our information we got the comparative balance sheet the income statement and some additional information we will use this information to put together our worksheet which will be the primary source used 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 to create the statement of cash flows using the direct method this is going to be our worksheet now most of this worksheet will be similar to what we have done for the indirect method in that we took the difference in the balance sheet account so we're taking the current year and the prior year the current period the prior period all the balance sheet accounts we've got cash down to the retained earnings for the balance sheet accounts but we're also in this case going to give us the income statement accounts for the current period so in other words we're going to break out the the retained earnings the amount that to its component parts meaning we've got net income being broken out on the income statement we've got sales costs to get sold the income statement accounts so it's going to be our same kind of worksheet here we're going to be in balance we've converted it from a plus and minus format we removed all of the subtitles as we did under the indirect method and we converted it from a plus and minus format as it is here on the financials to a debit and credit format verified that we are in balance in a trial balance and remember to do that we got to make sure that we're breaking out the retained earnings to its component parts to the income statement so this is the kind of the tricky thing to get this worksheet in place meaning you took the balance sheet and we're saying we're reconstructing the trial balance now kind of going in reverse and that means that the retained earnings really is now the beginning retained earnings and all the activity dividends net income sales and expenses are not yet closed out to it so you'll note that in comparing that to 2000 the prior period um there we were not going to show the income statement because i don't need the income statement for the prior period because it was closed out to retained earnings so we're going to say that is closed out to retained earnings but we're going to show all the activity that happened in this in this time period the current period in terms of the revenue accounts not being closed out why are we doing that why are we having this difference because when we look at the first component of the direct method which is going to be the operations flow cash flow from operations we were in essence going to reconstruct the income statement because that's basically getting to net income we're basically going to get to this net income number not using an accrual basis but using more of a cash flow basis so that's what we're going to try to do so in order to do that we're going to list out this information that detail and what we're going to do is go through these income statement accounts sales sales and convert it and say well it's not sales anymore it's going to be cash received from customers and we'll go through these accounts and we'll basically kind of convert them from an accrual basis to a cash basis that's going to be our goal now note that the only difference between the direct and indirect method is in the cash flows from operations so that the indirect method takes net income and kind of backs into the cash flow on a cash flow basis from operations whereas the direct method is going to try to convert each line item in essence to its cash flow basis so this is kind of it's more direct because it makes more sense if you look at it you can say I'm basically reconstructing here an income statement on a cash basis rather than rather than an accrual basis so to do that what we're what we're going to do is we're going to say okay cash received from customers that's going to be kind of like our sales item here to pick up the cash received from customers you're going to say well yeah we're going to pick up that sales item but that's not the only thing we're going to pick up why because that sales item is on an accrual basis how do we convert it to a cash basis well if you think through it you're going to say well what you know what does sales happen what happens in sales there's two journal entries that would happen well the the process of recording sales typically has that the sales cycle would be that we would debit the accounts receivable and credit sales that's the increase in this number and then we would get the cash later on which means we would debit cash and and credit accounts receivable now anything that is still in receivable here is is then not on a cash basis meaning in this case the receivables went from 80 750 down to 77 100 that would mean that we got more cash than we made sales in aggregate so that would mean that we would have to adjust this account the sales account for that so we're going to take this uh 100185 add the 3650 because we must have gotten we must have gotten paid here we got paid over and above the sales we made in 2000 x5 so we're going to have to basically net those two out and that's going to be making then the cash received so we've converted the sales to cash received by looking at the other account that's an accrual account related to sales then we're going to do cash paid for merchandise we're going to do a similar process here and say okay well what's going to be involved with the cash paid for merchandise well that's going to mean that we're going to have of course cost of goods sold but we also have the inventory it's going to be part of that process and we've got the accounts payable so this is going to be more of a kind of a confusing process we're going to have to put these together in order to see what the cash paid for merchandise is going to be and again you can think through this by thinking of the journal entries what what's the cycle for merchandise well typically we would purchase the inventory debiting inventory crediting accounts payable and then and then we would pay for the merchandise we would credit cash and debit accounts payable and then at some point we would sell the merchandise which means we would debit cost of goods sold and that and that would be part of the sales process when we sell the merchandise so these three accounts are going to be combined together to give us this 669-150 so we've got a deal when we have the cash paid for merchandise you can see this gets to be a little bit confusing because this cost of goods sold represents an accrual basis at the point of when the sale happened of course when we paid for the cash when we paid for the inventory it's going to be a different different scenario because the cash basis will differ from the accrual basis so then we're going to have cash paid for other operating expenses so if we pick up those accounts we're going to have the other expenses here and then we're going to have to say okay is there anything that's non cash basis for these other expenses whatever these expenses are is there anything up here that's going to be an accrual type of account and if we have something like prepaid expenses then that's going to be an accrual type of account related to the other expenses so any other expenses then we're trying to see are they all cash expenses that we pay cash for them or is there some type of accrual related to them if we've got prepaid expenses here then we're going to have to net those two together in order to get in this case decreasing it by the 360,950 so those two will be making up the cash paid to converse this number to an accrual basis and note what we're doing here of course is finding a home for all these differences just like we did with the indirect method where at the end of day we're going to get down to this 61,900 but we're finding a home for all of these differences and we're just going to kind of color code them as we go through this okay so then we got cash paid for taxes and that's just going to be this item here there's no accrual basis up here we don't have any prepaid taxes or accrued taxes so we're just going to pull that over directly and that'll give us our total so if we add up these add them subtract these up we get to 130,200 next we're going to have the cash paid for equipment and that's going to be in the cash flows from investing activities so we finished the net cash flows from operating activities now we're going to go to the investing activities now the equipment is often the most messy item here because if we look at everything that's related to equipment on our statement here on our differences we're going to say well obviously equipment's going to be related there and note that accumulated depreciation we could say well the difference in accumulated depreciation is usually going to be the depreciation expense here and if we were talking about the indirect method we would be taking depreciation expense in the cash flows from operations because we would be starting at net income and we would be pulling out the depreciation here of course the depreciation is not represented because we're reconstructing it and therefore not including depreciation in our construction so in order to add these numbers together in order to get them somewhere we're going to combine them together in this cash pay for equipment account and then we're going to go through any adjustments we need to make in order to break it out so we're going to say okay I need to find a home for this one equipment I need to find a home for this difference in accumulated depreciation which you would think would match out to the depreciation expense it doesn't that means that there's probably a sale that happened so I'm just going to match those out now in this one number and then I'm also going to include the loss which once again if it was an indirect method we would be pulling out of the net income number but because it's a direct method we're just never going to include it in that number so again I'm just going to combine that into this one number for now so that we can find a home for it and then we're going to go back when we make our adjustments and try to say okay what happened with the equipment did we buy equipment did we finance equipment how much equipment did we buy did we sell equipment and we'll have to go through that whole process so now for now we're going to adjust we're just going to combine these numbers together put them in there as cash paid for equipment and note that we'll probably have to go back and look at that again now most of the rest of this stuff is going to be similar to what we did on the the indirect method so remember the main difference is going to be the cash flows from operations and then the equipment of course is that kind of messy account because we have the income statement accounts we have some differences there on the equipment uh if when we look at the rest of these numbers we're we're basically pulling over uh these numbers in a similar fashion as we did in the indirect method so well so i'll leave those accounts there bottom line is we're trying to get to the ending cash an ending cash that ties out we're trying to get to the cash here the change 61,009 that matches here just like we did with the indirect method and the ending cash 123,400 that matches here finding a home for all of these numbers will do that we don't really want to get into breaking out these numbers or pulling information or numbers from anywhere other than this worksheet until we match this worksheet out and then think about what kind of adjustments we can do to uh trim this down fix any problems that are there now if we look at these the added data again we're going to look at those journal entries related to the equipment so we had the sale of equipment 26,050 uh the equipment cost 51 the depreciation 22,5 this is the journal entry that would be related to it and again in real life we would look at the gl we'd find this transaction and uh and then possibly pull out the the paperwork related to it if we needed to and then here's the loss so again this is like a plug so if we took you know the debits minus the credits we would need a plug of 2100 it's a loss because it's a debit also a loss because the cash received is less than the book value of 51 minus the 22,850 then we had this other one equipment that we purchased sticker price 113,250 we only paid 43,250 for it so then we had this note payable this financing we dealt with so this all deals with that equipment account what are we going to do now to fix our equipment account well if we go back here note we had this red item we're going to say okay we're going to do something to that now we need to go through this and say how are we going to use these journal entries to fix this number to make it you know align what with what we think it should be and yet not throw us out of balance that's our goal that's why we did it in this process when we look at this it's a little confusing because we can't really go line by line we're going to try to look at this and say okay what do we need to do to make this to make this work we know that the cash paid for equipment we're going to have to adjust that why because that that represents the actual cash flow here so the cash paid for equipment we're saying was uh this 43,250 so what we're doing here is saying well that this number here needs to be that that 43,250 so we're taking what's what's there it's the 87,200 minus the 43,250 and that should give us what it needs to be adjusted by because that's what this cash payment is made for and then we got a cash received for equipment and we know that we kind of included that here and we know that that should be broken out because that's cash that's coming in so we need another line item we need another line item and we know that's the case so we're going to put that here that should make these two amounts correct and then the difference then is going to be going to cash paid for the long-term note because that's where the other side of this of this happens so the the other side is going to be this notes payable so the notes payable then is going to be the long-term note which we had here that should flip to to be the correct amount so it was at 22.5 and this actually looks like the cat like like as if we received cash so it needs to be flipped in the negative direction and then once we do that we can kind of tie that out to the actual note uh in terms of the the cash paid for the long-term note we can look at the cash that was paid on the note which is going to be given in our example so this uh is the type of transaction we'll have in terms of increases and decreases which should keep us in balance here should make this right this right and hopefully this right as well so let's see if we do that then if we do that to our worksheet we're going to say that the cash paid for equipment was at 87.2 the 43.950 brings it to 43.250 then we're going to say that the cash received from the sale of equipment was uh 26.50 to 26 uh 1050 and then the cash paid for long-term note was at 22.500 looked like a receiving we took it down 70 reversing it down to 47 so now this description is accurate now it's cash paid not received as it looked here so then if we look at the full worksheet then we could say okay this is where we were at before this number was right this number was right which was the summing up of these numbers we had to fix this number and this number and this number we did so by having additions and subtractions that are in balance so kind of like a journal entry which left us with this hopefully being correct correct correct and still ending up in the same spot so we're still good we should still be in balance so then these numbers then are going to be like our final balance so we can kind of eliminate this stuff and then be left with our final balance which would look something like this again this could be cleaned up further uh and just in terms of formatting and some terminology and whatnot but this could be a worksheet a step-by-step process to help us to get to a place where we're in balance and we can you know if we're if anything goes wrong we don't have to go back to the beginning and kind of set this thing up in a step-by-step process