 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at the financing section of the statement of cash flow. This topic is covered in introductory financial accounting course, intermediate accounting, where I have this section covered a little bit more in depth and definitely on the CPA, the FAR section, heavily tested. If you haven't connected with me on LinkedIn, please do so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance, and tax lecture. This is a list of all the courses that I cover. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people, share the wealth, connect, follow me on Instagram, and on my website, you will have additional resources to supplement your accounting education and or pass your CPA exam. So if you want to add those 10 to 15 points to your CPA exam, I strongly suggest you check out my website. If you'd like to see the prior prerequisite for this recording, check the description for the prior prerequisite because the statement of cash flow consists of three section, operating, which was already done, investing, and in this section, we would look at the financing section. As I stated in the introductory session for the cash flow, when you think of the financing section, think of either raising money or paying back the money to the investors. So you have two sections just like with investing and operating, you have an inflow of cash and you have an outflow of cash. So where do the company finance itself? Well, they finance itself from their own stock. They issue stocks, whether it's common or preferred, or they issue short-term or long-term debt. Simply put, it's either investors, investors buy the stocks, or from creditors, they lend you the money. So that's the purpose. And from contributors, contributors are basically the same as people that issue, that have stocks. And also you can reissue treasury stocks. If you buy back your own stock, you can sell your own stock again. Now, simply put, the outflow are the result of the inflow. So if you have stocks, if you have stocks, guess what? If you have stocks, you have to pay dividend. When you pay dividend, it's an outflow of cash. When the owner contribute money, sometimes they take money out. And before you reissue the treasury stock, you have to buy the treasury stock. And also you borrow money, then you pay off the money, which is money means debt, whether it's short-term debt or long-term debt. So those are the activities that could be included in the financing section. It's basically issuing and paying your own stocks and bonds and debt. This is what I mean. Buying and selling your own stocks, buying and selling your own debt or paying off your bonds, paying off your bonds, okay? So to illustrate the concept or to analyze the financing section, we follow a three-step approach, just like the investing section. First, we identify the changes in the related accounts. We explain those changes in T account and we restructure the journal entries. Then we report the cash flow effect. And to illustrate those concepts, we're gonna be looking at the same data that we looked for when we did the operating and investing. So we have the income statement for Genesis. We have the two-year balance sheet with the related changes. And we have additional information. In the prior session, we already looked at B, we purchased plant asset. And we said this deals with investing. And at C the same thing, this deals with investing. And letter A dealt with operating. So we're already done with A, B and C additional information. We have D, E and F under D. We received $15,000 cash from issuing 3,000 common shares of stocks. We paid $18,000 cash to retire a note, to buy back a note with a 35,000 book value yielding a gain of 16. And the gain of 16 was reflected in the income statement, declared and paid dividend cash of 14,000. So this is additional information. Now, when you're dealing with the financing section, what you are looking for is, you are looking for a debt, like long-term notes payable. You have to analyze this account. You have to analyze common stock and you have to analyze retained earnings. Those are the accounts that we have to deal with because this is, those three accounts deals with either financing your company through either stocks or debt. So let's take a look at each one of them starting with the note, long-term note. Notice the long-term note increased by 26,000. What do we know about a note? What do we know about a note? Well, if you are borrowing money, your note will go up. So if you are borrowing money, let me just capture this screen and we can work with it. So if your notes payable, if your notes payable went up, so there we go, we have notes payable and it went from 64,000, it went from 64,000 to 90,000. This is what we know from those two numbers, 60 to 94. We already know from letter E, we paid $18,000 cash to retire a note with a book value of 34. What does that mean? It means at some point, we debited notes payable 34,000 to retire. But how much did we pay to retire this note? We only paid 18,000, a good deal. So we paid $18,000 in cash. This is a cash outflow. To get rid of a note that's worth 34,000, this is an excellent move. As a result, notice we had the gain of the difference of 16,000 and the gain was recorded in the income statement. So we are restructuring the transaction in a T-account. So for the 34,000, we know that we paid and all what we care about is this amount, what we paid, we paid 18,000. Now, if we take 64,000 minus 34,000, that's not equal to 90. It means we are missing the credit. Well, guess what? Well, guess what? We're gonna go back to letter C, which is I, not letter C, letter B, letter B, which is I erased. We issued a note for 60,000 to buy the land. So we issue a note of 60,000, but to buy land. We didn't receive the money in cash. So remember in letter B, I erased that it was a non-cash transaction. We issued a note to buy the land. Now, if we take 64 plus 60, minus 34 will give us the balance of 90. So simply put, all what we can say is we paid, I'm sorry, no, we paid. We received, I'm sorry, we paid, we paid $18,000 cash from the note. So simply put, after we analyze this note, we find out it increased by 36,000, but in reality, after all said and done, we paid 18,000 in cash. That's all what happened from a cash perspective because the 60,000 was a non-cash investing and financing. So practically we are done with the note. So let's take a look at the note. So the note, an increase of 26,000. And if we restructured the transaction, we debited the note, we removed the note, we credited the gain, and we credited cash. So this is the only thing that's cash. So, and let's take a look at the T account, which I already did. This is the beginning balance. This is the ending balance. We retired a note, but remember, this note only cost us $18,000 in cash. That's why we had the gain for the difference. So the only thing we did is we paid $18,000 in cash, and this we issued this note to buy the land. So this note was not really cash. Therefore, the only thing that we can say is, we paid $18,000, $18,000 for the note, not for the note, to retired the note. Now, what else do we need to analyze? What else do we need to analyze? We need to analyze the other accounts that are considered financing. What are the other accounts? Let's take a look at them. So we're done with notes. We can cross this out. Common stock went from 80 to 95. We increased by 15,000. That's easy. Why? Because in letter D it says we received $15,000 cash from issuing 3,000 of stocks. That's pretty easy. Just like it increased by 15 and all the cash, and all the stocks that we received raised cash, simply put. So we're gonna have an additional 15,000 of incoming cash. Let's take a look at it from a T-account perspective. So in analyzing this common stock, we went from 80 to 95, and they told us in the note we issued 3,000 shares. So simply put, we debited cash, credited common stock and 15,000. We credited common stock and it was all cash. Simply put, we can say cash received from common stock, 15,000. We are done with the second component of the cash flow statement. Let's look at the third component. So we're done with the notes. We're done with the common stock. Now we need the retained earning. Now the retained earning, we are already told that 14,000 was paid in dividend. We are told in the problem, but oftentimes what's gonna happen is this, you will not be told. So if we go back to the original data and we look at this note here, it says dividend paid and declared 14,000. So they told us we paid 14,000, but they may be silent. They may just say we paid dividend. And then your job as an accounting student or as a CPA candidate, you have to find out how much you paid in dividend. So to figure out how much you paid in dividend, you have to analyze retained earnings. So let's analyze retained earnings. What do we know about retained earnings? We know that net income increase retained earnings, net loss and dividend reduces retained earnings. That much we know. Now, let's erase everything. What do we know about retained earning? We know we started at 88,000 and we end up with 112. So what happened is we have a net income of 38,000 from the income statement. If you go back to the income statement, we have net income of 38,000. Now we are told that dividend is 14. We know that dividend is 14. Although dividend, if dividend information was not given, we can find out that dividend was 14,000, but it was given. But if the number was not given, you could figure it out. Sometime what they do is they give you the dividend, but they don't tell you what net income was. Well, if they told you, the beginning retained earnings is 88. If they told you, the dividend was 14 and the ending is 112, then you can find out net income, which will be 38,000. So let's take a look of how we analyze retained earnings. I just showed you the beginning, ending. This number was given and this number was given, but we can't figure out any of these if we are giving three of the four. And this is a journal entry to pay the dividend. And those are the three steps, find the change in retained earnings, explain the change, and cash pay dividend 14,000. Now we are done with the statement of cash flow. Let's recap what we did over the past three sessions. The first session, we looked at the operating section. The second session, we prepared the finance investing section and all these sections are in the description below. So you can click to view the recording. And this is what we did in this recording. We did the financing, issuing stocks, paying off the debt, paying off the dividend. So now we have plus 20,000 in cash, plus 2,000 in cash, minus 17, the difference when you net them out, they net out to 5,000. So this is the change. And if you look at the balance sheet, that was indeed the change in cash. Now, then what we do is we'll take the 5,000 plus the beginning balance in cash of 12,000. We give us the current balance. Remember the change is 5,000. So we did this one, two, and three. We prepare those three section to come up with this 5,000. Let me go back to the original data and tell you what I mean by this. So we did all this work. We did all this work to explain this 5,000, to explain this 5,000. So once we get to the 5,000, we add it to the prior year. We'll give us the current year of 17,000, all said, all said and done, perfect. Now in the real world, once you get to this number, you're gonna be very happy because once you get to this number, it means your cash flow statement works, but at least it balances, okay? Most likely it's correct. Oftentimes in the real world, you might be missing something or you might have transposed a number. It becomes a little bit of a hell. Let's go back to the best buy cash flow statement. This is what we did. We did the operating. We did the investing. Now we're gonna look at the financing section. The financing section right here. And notice very similar to what we did. We repurchased common stocks. We issued stocks. We paid dividend. We borrowed money. We repaid that. Now those two, you can net them out if you want to. You can have a net debt, whether positive or negative, but notice they spent money on financing. So simply put, they are paying back debt. They are buying back stocks, okay? Then we take the net increase, which was plus 8.84 plus the beginning of cash will equal to the ending of cash. Then as a supplementary information, you will have to disclose how much taxes and how much interest you paid as well, okay? If you like this recording, please like it, share it, put it in playlist and subscribe to the channel. As always, I would like to invite you to check out my website for additional resources, especially if you're studying for your CPA exam. It's a lifetime investment. Make sure don't change yourself when it comes to your CPA because you don't want to do so. You want to get the exam behind you and go on with your life. Study hard and stay safe during those coronavirus outbreak. Good luck.