 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at the investing section of the statement of cash flows. This topic is covered in introductory accounting, intermediate accounting, where I have it more covered in that course, as well as the CPA exam, the FAR section. This topic is actually heavily covered on the CPA exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance, and tax lectures. If you like my lectures, please like them, share them, put them in playlist, subscribe. If they benefit you, it means they might benefit other people, share the wealth, and connect with me on Instagram. On my website, you will find additional resources to supplement your accounting education and or pass your CPA exam. I can add 10 to 15 points to your CPA exam if you use my resources properly. Check out my website. If you are serious about passing the exam. The prerequisite for this recording is in the description. Just as a review, we have three sections, operating, investing, and financing. I already finished the operating. It's in the prior session. I will work on investing in this section and financing in the next session. So when you think of investing, remember, when you think of investing, if you're thinking about a business like a restaurant business, like let's assume we're looking at a restaurant called All of Gordon. So when you're thinking about All of Gordon, what do they invest in? When they invest, they invest in their property, plant, and equipment. This is the building. Or they invest in other stocks. They buy and they sell stocks and bonds of make sure other companies, when they make investments in other companies, when they lend money to other companies is when they invest or lend money. So the investing activities will also have two sections an inflow of cash and an outflow of cash. So what is considered an outflow of cash? Well, if you buy, if you buy plant asset, if you buy this building, if All of Gordon needs to operate more restaurant, they will need to buy a building. That's an outflow of cash. If you buy long-term investments, if you buy stocks, bonds, if you buy short-term investments, as long as you buy investments, whether it's short-term or long-term, it's gonna consume, it's gonna have an outflow of cash. If you lend money, in other words, if you give money to someone and you expect to be paid back the money plus interest, you are making an investment, it's if you loan money, what if you buy intangible asset? Now let me show you. The inflow of cash are exactly the opposite of everything that we said. So rather than buying plant asset, what you can do, you can sell the plant asset. Rather than buying long-term and short-term investments, you will sell short-term and long-term investments. Rather than lending money, you will collect your money. Rather than buying intangibles, you sell your intangibles. So you have two sections. One is buying and one is selling. So in the prior session, as I said earlier, we finished the operating section and this is the cash flow statement of Best Buy and we covered this section. And this section will work on the investing section, which is this section right here. So by the time we're done, hopefully I would remember to come back and show you what we did. So this will make more sense because this section is already done. So preparing the cash flow statement, remember we have the five steps that we talked about in the prior session. Step one is to compute the difference in cash. We did that in the prior session. Step two is to complete the operating section. We did that. Step three is to compute the investing activities. And this is what we'll focus on. In the next two session, we'd look at financing and wrapping everything up. So now we're gonna focus on this step specifically and to complete this step, we're gonna follow three-step approach. The three-step approach determine whether we provided cash or used cash, was the cash plus or was the cash minus from this investing activity. First, we identify the changes related to the accounts. So we have to know which account are we dealing with. I'm gonna show you in a moment. Explain these changes using T account and restructuring entries and we'll see how we do so. Then we would report the cash flow effect. So don't worry, we're gonna look at these steps and details in a minute. And here's the information that you are working with. The same information as in the prior session because in the prior session, we only cover the operating activity. So we need the income statement. We need two year of comparative balance sheet which we have and we need the additional notes. So we have everything that we need. Here's the income statement, sales minus cost of goods sold, so on and so forth. It gives us net income. Now the additional information, it's gonna become very relevant here because if you look at letter B, it says we purchased 60,000 of plant asset by issuing 60,000 of note that's gonna be important for us. Sold plant asset with a book value of 8,000, original cost of 20 accumulated depreciation at 12 for $2,000 and we yield the loss of 6,000 and this loss is showing in the income statement. We received 15,000 from issuing shares. It doesn't, we don't care about this. This is a financing activity. Paid 18,000 cash to retire a note that's also financing, declared and paid dividend that's financing. So you're gonna see that B and C is relevant for us. B and C is relevant for us. So here's what you need to be thinking about. When you are working with the investing section, you should be focusing on long-term plant asset and investments. In this example, we don't have any investments. In this example, we happen to have no, no investments. We don't have investments. Therefore what we have to do, we're gonna need to focus on this section. What happened in this section? Analyze this section to determine whether we paid for plant asset or did we sell plant asset and how much what's the net in cash. So again, let's focus on the plant asset. If we notice, we started with the prior year was 210, the current year is 250. Therefore there was an increase of 40,000. Also what comes with plant asset is accumulated depreciation. So the analysis revealed, plant asset went up 40,000 from 210 to 250 and accumulated depreciation, which is a related account went from 48 to 60, which went up 12,000. That much we know. But we also know that we sold and we purchased plant asset. So there was a change in plant asset. Because there was a change, we need to analyze the change to determine how much of the change is cash related. So let's take a look and restructure the journal entries. What do I mean by restructure the journal entries? Well, let's take a look at item B. If you remember, we are told an item B. An item B, we were told that we purchase plant asset for 60,000 by issuing 60,000 in notes payable to the seller. Well, here's the entry. We debited plant asset, we credited notes payable. What is the cash? No cash. This transaction is called a non-cash investing slash financing because plant asset and it's investing notes payable is financing, but it's a non-cash. Therefore, it's not gonna affect our cash, but it's gonna help us account for all purchases and sales. In item C, we were told that Genesis sold plant asset costing 20,000. The original cost was 20,000 with accumulated depreciation of 12. Therefore, the accumulated depreciation is gone. The $20,000 is gone for 2,000 cash. Well, that's very relevant for us because we received cash resulting in a $6,000 loss. So let's restructure this journal entry. We sold plant asset with original cost of 20. We credit the original cost. We debit accumulated depreciation. Then we debit cash for 2,000 and we debit a loss. So this is the journal entry that took place. This is the journal entry that took place. Well, think about it. If this is the journal entry that took place, it means we have plus cash of 2,000. So we purchased something, but there was no cash. So basically this transaction is like, it doesn't affect the cash flow statement itself. We'll need to disclose this information, but that did not affect cash. This transaction did affect our cash. How so? We increased our cash by 2,000. We also need to restruct the depreciation using the information from the income statement. And if you look at the income statement, let's go back and look at the income statement, it seems we booked depreciation of 24,000. What is the journal entry for depreciation? Debit depreciation expense, credit accumulated depreciation. So notice we have three activities or three journal entries that are related to this, to the plant asset. Transaction one, no cash. Therefore it doesn't affect our cash. Transaction two, we have plus $2,000 in cash. Transaction three, no cash. And actually we already accounted for the depreciation expense when we restruct, when we prepared the operating section. And let's take a look at this from a T account perspective. The beginning balance and plant asset was 210, the ending balance was 250. This is what we are giving from the balance sheet. We also know that we purchased 60,000 worth of assets. But remember, this purchase was no cash. If we purchased it with cash, then it will be negative 60,000 and outflow of cash. Remember, we purchased this asset by borrowing money. Okay, now then we sold an asset and therefore we credited sales, we credited, I'm sorry, plant assets for 20,000 because we sold it 210 plus 60 minus 20, 250. So we accounted everything in the plant asset. Now when we sold this plant asset, we sold it for 2,000 and obviously 2,000 in cash. We sold the plant asset and we removed the accumulated depreciation. Therefore, let me highlight those two entries that go hand in hand, we sold the asset and we get rid of its accumulated depreciation. So we have a debit and accumulated depreciation. Then we started accumulated depreciation with 48. We ended it with 60 and we know from the income statement we booked 24,000 of depreciation expense. Now we accounted for everything, 48 plus 24 minus 12 equal to 60,000. We accounted for everything. So we had two transactions in the plant asset. One is a buy, which involves no cash. One is a sell that involves cash. All what we care about, all what we care about is the cash component. So all what we have to say is cash received from a sale of a plant asset of 2,000. That's all what we did. Then we disclose the 60,000 purchase in item B was paid using a note as a non-cash investing and financing activity and this information will be this close. This information will be disclosed. Simply put, let's see where we end up now in the statement of cash flow. First, we prepare the operating section in the prior session. You could look at the description if you want to see this. In this session, we prepare to find the investing activity. All what we did is we purchase and sold plant asset but as far as cash is concerned, we only paid, we only sold and received $2,000 worth of cash. In the third session, we would look at the financing section, which it's hitting here. But let me go back and show you the Best Buy investing section to show you how this all fits together. Remember when we looked at the investing section earlier and I told you we will go back and revisit this. So notice for Best Buy, we have addition to property, plant and equipment. So we purchased 819 million. Purchase of investment, there was none. Acquisition of business, net of cash, I'm sorry, there was no purchase of investment or a sale of investments of 2 billion or 2,098. And acquisition of business, net of cash, 787. So they purchase other businesses, which is they make investments in other businesses. They purchase property and equipment and they sold some investments. And there was other net, we need to know what's in the other net, basically look at the notes. We don't know overall, they have a net cash provided. So they received more cash from investing than they spent in the prior year. They spent more cash in the prior, in the two years ago, they spent more cash in investing. So basically if you like this recording, please like it, share it, put it in playlist. In the next session, what we'll do is we would look at the third section, which is the financing section. As always, I would like to remind you to visit my website if you are studying for your CPA exam or if you want additional resources to succeed in your accounting career. Study hard, good luck and stay safe, especially during those coronavirus days. Good luck.