 and welcome to this session in which we would look at an example that deals with the statement of cash flows. In this example for the statement of cash flows we need to determine in which section of the statement of cash flows this activity is listed and we have three sections, we have operating, investing and financing and also we have kind of third category or a fourth category that's called non-cash investing and financing. Simply put it's a non-cash activity, it's a non-cash investing, non-cash financing so we need to identify those activities as well. Now also for the operating section I'm going to determine whether I'm going to add or deduct from the operating section. So when you are preparing a statement of cash flows you need to determine under which category does this activity goes, is it operating, is it investing, is it financing or it could be non-cash investing and financing. Then after you determine the category you need to determine whether this is a plus, is it going to add to cash or deduct from cash. So let's go ahead and get started by looking at purchase of equipment, so the company purchase equipment. Under which category would we list this transaction, is it operating, investing or financing or is it non-cash investing and financing. Well if we purchase an equipment and that's all we are told we assume that we purchased it. So it's a non-cash investing and financing because we made a purchase and when you buy property, plant and equipment this is a form of investing in your business so you are investing in your business and when you purchase it's a negative. When you purchase something you have to pay for it, it's a negative cash. So that's investing and negative. 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. The second item is depreciation. Now we purchase the equipment or the splint asset. Now what do we do? We depreciate the asset. Therefore we're going to be taken depreciation expense and this is specifically depreciation expense. Under which category we would list depreciation expense and here we are assuming we are using the indirect method and the answer is all expenses because they are income statement accounts they go on the operating section. Now the question is this how do you list depreciation expense under operating section? Do you add or do you deduct? And the answer is you add depreciation expense under the operating section. You need to know why. Well when we prepare the income statement we start with revenues minus expenses gives us net income. Then when we prepare the statement of cash flow we start with this net income then we make certain adjustments. Well part of the expenses was depreciation expense. So what we did is we deducted depreciation expense and depreciation expense is a non-cash so we deducted something that reduced our net income without reducing our cash. Now if we are computing our cash operating income what do we have to do? We have to do the opposite since we deducted the depreciation now we add the depreciation. Exchange of plant asset equipment with the fleet of trucks. So we took a bunch of plant asset equipment and we trade them with the fleet of trucks. Well plant assets are form of investing trucks are form of investing. Well what is this? Is it investing? And the answer is since we are told we exchange them we did not pay for anything it's a non-cash financing and investing. So this is a non-cash financing and investing. This is an example of it. Now what do we do with these transactions? We will disclose them. There's a place at the bottom of the statement of cash flows we will disclose. We'll tell the users that we did exchange and in the notes of the financial statement we might add more information about this exchange. Redemption of loan. What does what does it mean? It's a fancy word for paying off your loan. You are paying off your loan. Well loans when you borrow money and you pay back your borrowing it's a form of financing yourself. So the category is financing and since you are paying off the loans it's negative. The opposite is true if you are borrowing money it's financing but positive. Sale of equipment. Well sale of equipment is the opposite of a purchase of equipment right? So it's investing and sale you are selling your equipment that's a positive. Now that's not good sometime when you're selling your equipment especially if you are trying to raise cash you don't really want to sell your equipment unless your equipment are not needed anymore which is why they're not needed since you bought them so it's it's not usually it's not good. Okay but it's an investing and it's bringing cash positive. Issue wins of common stock. You are selling your own company common stock. Well that's a form of financing this is how you finance yourself so it's financing and since you're selling stocks you're receiving cash in return that's the assumption since we are not told otherwise. Now payment of dividend now you issue the stocks now you have to pay dividend. Well kind of unrelated therefore I would say dividend is finance and since I'm paying it's a negative payment of dividend clearly is negative. Now you have to be careful here because I kind of made a statement it's not it's a true but I don't want you to generalize it to generalize it. I said issuing of common stock is financing issuance of loan or bond is also financing but the interest when you pay interest on that loan which is a financing interest is operating so that's kind of a little bit odd that the interest on the loan is a is an operating activity the dividend on the common stock is financing although the common stock is financing and the loan is financing just something to be aware of that interest expense is an operating activity. Amortization of intangible asset. Amortization follow the same concept of depreciation. Depreciation is for tangible asset amortization is for intangible asset therefore it's operating and we will add to cash flow just the same concept as depreciation. Issue bonds which is borrowing money for warehouse well you issued bond bond is a financing a warehouse is investing but no cash exchange this is a non-cash investing and financing. Now we issue bonds for cash that becomes a financing because we receive the cash and it's a plus. Now remember the interest that's paid on that bond will be operating and will be a minus it will be deducted from operating activities so notice the difference here the interest on the bond is operating increase an interest receivable on bonds so this is now we have a receivable and receivable is an asset specifically of a current asset and when current asset goes up your cash flow goes down it means you are generating income without getting the cash so when your receivable goes up it means you are reporting revenues but that revenue is non-cash revenues. Pension expense exceeds amount funded so you have a pension expense well the pension expense is definitely operating and if pension expense not paid if you did not pay it so it's you recorded the expense and you accrue it it's basically going to increase the cash flow just like depreciation expense it's an expense but but's not but it's not being paid in cash purchase of treasury stock you bought back your stock well that's the opposite of issuance of stock so it's a financing and it's minus you are buying back your own stock gain on sale of asset so you sold an asset and you had a gain now selling of the asset itself we saw the selling of the equipment is an investing the gain because you might have a gain you might have a loss how do we treat the gain or the loss on the statement of cash flows the gain is goes under operating because remember gains and revenues they go on the income statement they're part of the income statement now the gain increases your net income without increasing your cash and the loss reduces your net income without reducing the cash so how do we make the adjustment gain is an operating activity because it goes on the income statement and we deduct the gain because the gain increase net income and the gain itself is not the cash the cash is the sale therefore we deduct the loss is the same goes on the operating section and since the loss reduced net income without reducing the cash we did not really pay cash for the loss the loss is just an accounting figure the difference between your what you received and proceeds and your book value therefore we add increase in prepaid prepaid is a current asset when your prepaid goes up it's a negative cash flow the assumption is you paid for that prepaid if your prepaid are going up it means you are buying more prepaid than expensing and the opposite is true if your prepaid goes down your cash flow goes up because you are expensing the prepaid that you paid for in another period increase in and accrued liabilities so when your current liability go up when your liabilities goes up it means your cash flow is also going up why because you are borrowing you are accruing you are recording liabilities to operate so the expenses here are non-cash expenses you are operating the business but you are not paying cash therefore it's a positive cash what should you do now go to farhat lectures and work mcqs you really want to know this inside out you should not have any doubts about any of these items because those items will be given in a different format either in a balance sheet format in an exhibit format on the exam you want to be very comfortable as soon as you are giving something like this you would know exactly where it goes you are comfortable with it invest in yourself your cpa exam is important don't take this slightly it's an investment in your career study hard i'm always here to help you and stay safe