 Hi, and welcome to this tutorial on preparing statement of cash flows using the indirect method. I want to start here with some steps to prepare the statement of cash flows, sort of a conceptual overview of what we're going to talk about, and then I want to look at a real problem and how we solve it. The first thing we want to understand about the statement of cash flows is what, one of the purposes of the statement is that it helps us explain the change in cash. So one of the things we're immediately going to be able to do is, if we arrive at a solution for the statement of cash flows, that amount should be the same as the difference between our beginning and ending cash balances. The statement of cash flows is in three, has three sections. The first one is the operating activities section. The second is investing activities and finally financing activities. For the operating activities section and using the indirect method, we're going to analyze the changes in our current assets and current liabilities along with a few other items to help us arrive at our net cash flows from operations. Investing activities, this is where our changes in our long-term assets are going to appear. So if we've bought long-term assets or sold long-term assets. Finally financing is changes in our long-term debt or any changes in equity. There is also a section for non-cash investing and financing activities. I don't think our problem is going to have anything like that. So the format of the statement of cash flows with the indirect method. I'd like to walk you through this procedure. So with the indirect method, we start with a cruel accounting net income. And then we prepare a section for the adjustments to reconcile our net income to our net cash provided from operating activities. So the next step we do is we add back our non-cash items. For example, depreciation expense, amortization expense. These are expenses which have been deducted to arrive at net income. But they are not expenses that ever get paid to anyone in cash. Therefore, these expenses don't affect the cash flow of the business. So if we've deducted them from net income, we want to add them back here. The third step is this section here. Adding back losses or subtracting gains. Here's the conceptual idea behind this. Let's think of just two examples. Let's say we had loss on early retirement of bonds and a gain on sale of assets. So the loss on early retirement of bonds is going to be a part of our net income because losses appear on the income statement. However, if we are paying off our bonds, that is not an operating activity. Bonds relate to our long-term debt and that is a financing activity down here. So what we are doing by adding back the loss on early retirement of bonds is we are canceling out or negating the deduction of the loss from net income. So the loss is subtracted in net income. We add it back here to cancel it out because it's not an operating activity. Let's look at the other example. Gain on sale of equipment. Selling equipment, again, not an operating activity. It is an investing activity. Now that gain has been added into our net income because the gain is on the income statement. We want to subtract that amount here to cancel it out. So any gains we have on the income statement, we're going to subtract those. Any losses we have on the income statement, we're going to add those. There's no such thing as a gain or a loss from operating activities. So all gains or losses are from activities other than operating. Finally, we hit this final section. Increases in current assets other than cash is subtracted. Decreases in current assets other than cash are added. So if my accounts receivable increases 20,000, I'm going to subtract 20,000 here. If my inventory decreases 5,000 from the previous year, I'm going to add 5,000 here. Increases in current liabilities decreases in current liabilities. I add increases, I subtract decreases when it deals with my liabilities. So if my accounts payable increases 10,000, I'm going to add 10,000 here. If my salary payable decreases 2,000, I'm going to subtract 2,000 here. I've got all of those things up and I arrive at my net cash provided by operating activities. Alright, looking at the next section, cash flow from investing activities. This is going to be the sale of long-term assets like long-term investments, property, plant and equipment, patents, etc. Also, and by the way, when we sell them, we're going to be adding here because we are receiving cash when we sell them. When we purchase long-term assets, we subtract that amount here because we're paying out cash. We calculate those, we end up with our net cash provided by or used for investing activities. And for most companies, this is going to be a used, meaning that we would have net cash outflow from investing activities. Alright, and then we have our final section, the cash flows from financing activities. Financing activities, again, are things related to our long-term debt and our equity. So you can see we would add cash receipts from an issuance of stock. We would add, you know, if we sold treasury stock, we'd add that. We would subtract if we purchased treasury stock. If we borrowed a note or issued some bonds, we would add the cash receipts. If we paid off the note or bonds, we would subtract it. If we paid a dividend, we would subtract it. This would give us our net cash provided by or used for financing activities. So then, I would add up my net increase or decrease. So the net cash from operating activities, plus the net cash from investing activities, plus the net cash from financing activities, and keep in mind some of those might actually be subtractions, gives us my change in cash for the year. That should balance with what our balance sheet shows as the difference between our beginning and ending cash. I put my beginning balance, I equals my ending balance. That's how we reconcile it. Okay, I want to take this procedure now and move over to a problem. So here is my comparative balance sheet. This is how I can figure out my change in cash and my other change in accounts. You can see that information there, as well as some other information. So what we want to do is compute the, or compute, let's make the cash flow statement using the indirect method. So I'm going to scroll down here. I want to start with net income. Net income was 27.9. So I move down to here. Statement of cash flows, operating activities, net income, 27.9. Then remember, I want to add back depreciation expense. Okay, so let's go up into the information that we have and find out what we know about depreciation expense. In this case, it tells us depreciation expense was $5,000. So we know we want to add back depreciation expense. So here we have a depreciation expense, $5,000. The next item on the list is that we add back losses or subtract gains. If we read this additional information, it tells us the common stock was issued. That's my wrong one. The land was sold for $5,900, which included a loss of $2,100. So I come down here and I have a loss on sale of land and I add back $2,100. Okay, now I need to go figure out my changes in my current assets and current liabilities. Now my first current asset is cash. But the change in cash is what we are trying to explain here. So we're going to skip that one and go to accounts receivable. Accounts receivable decreased from $23,400 to $18,200. So if I have a decrease in accounts receivable of $5,200, I add that back. I don't have any other current assets. Land, building, accumulated depreciation are all long term. So I go to my current liabilities. I have accounts payable. Accounts payable was $31,100. Now it's $12,370, so it decreased. For liabilities, when I have a decrease, I subtract it. So I subtract $18,730. The net of all of these is $6,430, a deduction, giving me net cash flow provided by operating activities of positive $21,470. Now let's go to our investing activities. In this case, the only information I have about my investing activities, my buildings didn't change, my accumulated depreciation only changed by the amount of depreciation. But you see that I have a land decrease of $8,000, and it tells me that my land was sold for $5,900. So the cash impact of selling the land is just the cash we receive. So we receive $5,900. Moving on then to our financing activities. I've been wanting to do this stock the whole time, so here we go. We can see that we issued common stock for $6,000. So issuance of common stock plus $6,000. The payment of a dividend is as dividends were declared and paid $22,500. So that is a reduction $22,500. So net cash used by financing activities minus $16,500. So my change in cash plus $21,470 plus $5,900 minus $16,500 gives me a change in cash of $10,870. If I look at this account here, I had $10,700. I now have $21,570. That is the same as my $10,870. I have that amount there. I add my beginning and my cash at the end of the period, $21,570, matches what's on the balance sheet. Okay, I hope that this helped. Remember you can watch this as many times as you need to if you need to go to a little bit slower pace. Good luck.