 Hello in this lecture we'll be working a problem about the statement of cash flow. We'll be using the indirect method to work this problem. We'll talk more about what the indirect method is as compared to the direct method as we go through this. We're going to have the information on the left hand side. We're going to enter that information into a worksheet here which will help us to put together the statement of cash flows. 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. Then we'll put together the statement of cash flows and we're going to have a few adjustments to them. Few things we're going to want to learn when we do the statement of cash flows. It's good to do this because one it helps us to read the statement of cash flows which is which is good. So creating the statement of cash flows helps us to later read the statement of cash flows. It also has a similar issue in terms of balancing just like when we have the balance sheet if it's not in balance. We might have to go do the whole thing looking through the whole thing over again to see where it is out of balance. We're going to want to build a structured system in that we can basically try to find check figures along the way so that we can see if we are out of balance, where we are out of balance instead of basically waiting till we're at the end of the whole process and then having to do the whole thing over basically to find out why it's not tying out. So we're going to look for systems to put something together in such a way that we can have kind of checks as we go to prevent the case where we have to go back and do everything over again. So the statement of cash flows generally most people will take the statement of cash flows and put a worksheet together that will help them to create the statement of cash flows. That's how we'll basically approach this. Now note that the statement of cash flows is as of a flow time period has a beginning and an end. It's not a point in time such as the balance sheet but it has a beginning and an end time frame and we are of course measuring the flow of the cash, how much cash came in, how much cash came out through a certain time frame usually being a month or a year or something like that and the funny thing is that we actually measure that using basically the balance sheet often times and that balance sheet is of course as of a point in time. So what we're going to do in this case is we got the 2005 and 2004 and we are measuring the difference basically what's going to happen between that time period meaning we're measuring as of the end of the statement will be as of the end of 2005 or measuring the period ended 2005 and we're going to look at the beginning period which is the end of the last financial statement. So 2000x4 is the end of last year. It's also of course the beginning of 2000x5 same numbers and we're going to compare where we are at the end of the period the point in time, the balance sheet to where we were at the beginning of the period. The change between those two we're going to assume is where we start to figure out the flow, what happened, what happened over time, what's the change that happened. So we're going to take this information we're going to put this into our worksheet we're going to do some data entry first this is going to be a bit tedious but it's worth doing because obviously data entry is something we're going to do often and this is the first time where we're basically taking the balance sheet and putting it back into pretty much like a trial balance format. So in prior lectures we've taken a look at putting a trial balance in debit and credit format and then making a financial statement from it we're basically doing the opposite now now we've got a plus and minus format in the financial statements just on the balance sheet though and we're going to basically put that back in real quickly to a just like a trial balance debit and credit type worksheet so let's start with that. So we got the cash here cash is a debit we're going to represent debits with positive numbers and credits with negative numbers in this worksheet that will help us to save some columns also help us with some formulas. So this is going to be a 1 2 3 4 5 0 in the cash counter siebel 7 7 1 0 0 the inventory 2 4 0 6 0 0 and the prepaid expense of 15 1. We have a check figure here being the total current assets we're not going to put that total current assets the totals will not go into our worksheet however it's a good place for us to add this up and say are we doing what we should so far we add up to 456 250 456 250 so we're on track so far the property plant and equipment 262 250 and the accumulated depreciation notice if we put in 1 1 0 7 5 0 here and we do our check figure thing we add these two up it doesn't check to this check figure and if we add up all the assets it doesn't check to the total assets here why is that because the accumulated depreciation is a contra asset so people often get mixed up in this area just you can see that in this financial statement by the fact that it says less that means it's a minus problem in our case we're going to say that it's a negative or a credit over here so we're going to say this is a credit negative it's a contra asset meaning it's an asset with a credit balance unlike other assets that have debit balance so it's contra to the norm then we're going to have our liabilities liabilities are credit balance accounts we're going to represent the credit balance accounts with negative numbers on our worksheet so the accounts payable we're going to say it's negative 1 7 7 5 0 the notes payable we're going to say it's negative 15 000 for a credit if we add those two up I'm just going to highlight those two in the taskbar 32 750 ties out to the 32 750 then we're going to put down here we're going to continue on to the 100 000 and then we have total liabilities which is of course the accounts payable down here 132750 we can use our check figure 132750 looks correct we're moving on to equity equity also has a credit balance so we're going to represent the credits with negative numbers in this case so we're going to say negative 215 000 and additional paid in capital negative 30 000 and then retained earnings negative 230 and that should take us in balance meaning that the debits minus the credits equal zero note that that has to work the debits minus the credits must equal zero if it doesn't then what happened is we just probably have the sign going the wrong way on one of these and all we have to do is just go through our check figures and see that each piece ties out to the subtotals here and if they do then it will work all right so we're going to take the 2000 x1 we're going to do this one more time I know it's tedious but I'm just going to do it fairly quickly and we'll put this through here so we got the cash 61550 and then the 80750 250700 prepaid one two three zeroes 250700 prepaid expenses 17000 check the subtotals we'll highlight those 140 uh 410 410 then we'll do the property planting equipment 200 000 for equipment less meaning contra asset negative credit balance 95 000 for accumulated depreciation we can check the subtotal of 105 105 or all the assets total assets 515 515 looking good so far going down to the payables payables we've got negative 102 we've got the short term debt 10 000 credits we have a subtotal we can highlight those two 112 112 so we're looking good we're going down to the next word long term negative 775 and once again total asset total liabilities we can highlight the three liabilities taskbar adds up 189 5 looks good so far moving down to common stocks it's common stock negative credit balance 200 000 we have additional paid in capital zero retained earnings negative 125 500 that should put us in balance like so so it does do so if we have our check figure it has to work now the idea here is going to be that if we have something that is in balance indicated by the debits minus the credits equals zero and if we have something else that's in balance then we can take the difference between all these accounts and we will end up with something that will also be in balance so we're going to do a subtraction problem here and we're going to take the difference that change from 2000 x 5 and 2000 x 4 so the formula is going to be equals 2000 x 5 minus 2000 x 4 equals 2000 x 5 minus 2000 x 4 equals 2000 x 5 minus 2000 x 4 equals 2000 x 5 minus 2000 x 4 and you might be saying there is an easier way to do this and there is and we can use the autofill to continue this formula down so i'm going to do that at this time obviously the formula will be the same it's a relational formula therefore we can use the autofill by putting our cursor on the fill handle so it looks like that holding down the left click and dragging down auto drives it down dr. filth calculates and there it is we get the zero sub total down here now obviously if we want to see what's happening we can double click on any cell and it's still the same thing that is going on so if we take the difference from each of these items then it must add up to zero that change must add up to zero so now that we have this little worksheet here what we're going to do is we're going to take that worksheet and we're going to put it into the format of a statement of cash flows what does the statement of cash flows look like it's going to have three parts it's going to have cash flows from operations and that is going to be the area where it's most related to the question of it is related to the question of whether we have a direct or indirect method so we're going to be using an indirect method and the idea here being that if we look at the income statement it's on an accrual basis so when we think about the income statement how much revenue and expenses we have that's how we did over time but it's on an accrual basis and we want to see what the flows are in terms of cash so we could take the income statement and rename the entire thing meaning we could rename the the sales account or the revenue account to be cash received from customers and rename the expense account to be cash paid but that might take more work in some cases if we already have that would be the direct method by the way if we already have the net income number it could be easier for us to actually take that ending balance number that we've already calculated on the income statement and then back out the things that are not cash and that's going to be the indirect method the indirect method is by far the most used method and there's a few reasons for that one it might be a little bit easier for the reasons we just stated that we already calculated net income and two many times it's required in a lot of different settings so a lot of times if you do the direct method you still have to do the indirect method I personally do like the direct method because I think it presents the the information in a way that more people more readily understand because it just represents the information in in terms of a cash flow on an income statement but the indirect method is is by far the most used so therefore we're going to take a look at the indirect method so we're going to start with net income and then back everything out from there in the indirect method uh we also have however cash flows that are not on the income statement they're not basically income statement type things they're things that uh such as cash flows from investing activities so if we purchase like a truck or a large piece of equipment a building then that wouldn't be on the income statement even though there's cash flow so we're going to record the cash flow but we're going to put it down here into an investing activities and then we've got cash flow from financing activity and once again those are going to be things that cash went in and out we paid or received loans or something like that dividends and whatnot we'll go into this section now the idea here is going to be that we want to find a home for all of these numbers once we find a home for all of these numbers we will be in balance in this case we're shown we're in balance by this zero down here in the statement of cash flows what's going to happen is we're going to find a home for all numbers except cash right and if we find a home for all numbers except cash what will be the difference it will be the change in cash sixty one nine sixty one nine so this sixty one nine is going to be at the end of the cash flow statement that's going to be the increase right there so that's what we're going to end up with we're going to find a home for everything else which will leave us with the change in cash um also want to note that we are first just going to find a home for the numbers listed here in this type of format that i'm showing you uh we will then later have to go back in and break some of these changes out into smaller components into components of these numbers i would suggest that we first find a home for all of these numbers and then recognize that we're going to have to go back and find a home for uh or fix some of those numbers or break them out into the components the reason for this is because this will help us to basically be in balance and then do the changes in such a way that we can not have a problem and and end up once again being at the end of the process and not knowing where we went out of balance so if we find a home for all these numbers before we start breaking them up into a bunch of different numbers then we can say okay we're in balance now let's adjust what needs to be adjusted and if something gets out of whack we have a uh we know where went out of whack and that's with the adjusting process so in order to do that we're going to we're going to basically just go through this list of accounts but we're really going to start with net income because that's going to be the start of the cash flows from operations and again most of you're going to be really tempted to say well let's go look at the income statement that's that's where net income is and you're right but i'm going to start with net income as the change how can we think of what net income is as far as the change in the balance sheet and oftentimes this is like the most confusing question to start off with but the answer to that is in retained earnings so the change in retained earnings is in part going to be net income so this and that's because basically we closed out net income to retained earnings in the closing process so retained earnings part of that change the big part most of it is net income now you so we're going to use that 104 and in order to bring that 104 up here i'm going to put a negative and point to this 104 and enter so i'm going to flip the sign i'm going to do that with all of these accounts just to make the worksheet work that's just how the worksheet is going to work don't worry about this side over here that's going to be when we adjust the information the first thing you're going to probably say is well you know we have