 in this presentation we will build a statement of cash flows using the direct method we're going to have our information on the left side we're going to build our worksheet with that information and then create our 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 from this worksheet we're going to use a step-by-step process to create the statement of cash flows designed to minimize the amount of errors that we have like a balance sheet of statement of cash flows is one of those types of statements that we can get to the end of it see that it doesn't tie out the way we want and not know where to go from there what we want to do is avoid that problem by making step-by-step checkpoints along the way so that if we run into problems we don't basically have to start over again that's going to be part of the design of putting together the statement of cash flows on the left side our information we have a comparative balance sheet which means we have a balance sheet for two periods we're going to be in the current period here and the prior period that's typically going to be necessary no matter what type of cash flow we're making whether it be direct or indirect we typically want a comparative balance sheet a balance sheet with two time periods that's the primary tool that we are going to be using to make our worksheet which we will do this time then we're going to have our income statement so these are going to be the financial statements of course up to this point that we created from the adjusted trial balance and then we typically have some other information that we're going to have here now this is going to be given to us in a question like this kind of like a book question type style we'll just give the added information we'll talk about in practice what would happen in practice where would we get this information in practice and generally we would kind of know this stuff and look into it in terms of breaking down the detail and the general ledgers so once we get into this we'll talk more about this we'll go through this in a step-by-step process however first making the worksheet that we're going to use and to make the worksheet for a direct method it's going to be a little bit different than we did with the indirect method we're going to use a component of the income statement as opposed to just having the comparative balance sheet but we'll start off in the same kind of way here many people when they do a statement of cash flows they may just take the comparative balance sheet and just add another column and have the difference between them I like to actually put this into a new worksheet and basically convert it back into a debit and credit format because logistically that just makes it easier it makes everything flow better once we set this process up a few times it's also really good practice the statement of cash flows is a good practice because it allows us to in some ways deconstruct some things and see how things are put together so that's really good for just learning accounting so even if we're not going to be doing statement of cash flows all the time if we can put one together we're really have a pretty good understanding of what's going on because we have to do some deconstruction and work backwards in order to make this happen and that helps to understand things so what we're going to do is we're going to take this balance sheet we're going to put that into our worksheet here and we're going to do the same thing that's over here it's going to go line by line but we're going to convert it from a plus and minus format as is the case for financial statements back to a debit and credit format so we're kind of doing the opposite of what we did when we made the financial statement and in doing so we're going to eliminate some of these subcategories we don't need when we're putting this together we're not going to have assets or current assets or property plants and equipment or total current assets here we're going to eliminate those and just simplify this process back to just basically a trial balance we're going to do that for the two periods just like we have here and then we'll subtract out the two and we'll have the difference that's really what we're looking for so we're just going to do this line by line i'm just going to say that uh you know the first one it's just going to be cash we're just going to pull this over line by line you can type these in here and it might be better to actually go through here if you want to go faster and type out the accounts first and then enter the numbers i'm going to do them line by line across so that we can see the data and where it's coming from more easily so there's a difference between how fast we want to do this and how much we want to understand it so if we want to understand it well better to do line by line going across if you want to do it as fast as possible probably better to type in all the accounts then type in column by column each number okay so the cash for 2000x5 is going to be the 13123450 tab and then 61550 and then we're going to take the difference between these two and when we take the difference i'm going to take uh the current year minus uh the prior year so it's going to be equal i'm going to take 2000x5 minus the 2000x4 and so that difference then represents it increasing for the asset now note that i this is going to be a debit for us now so we're going to have to deal with that issue we have to deal with whenever we convert from plus and minus to debit and credit this is going to be for us debits and credits because that'll make an easy check figure for us that we can then just be sure that we're in good we're in balance and that'll make it easier for us to then just convert this just another puzzle to just change the formatting of it to get to a cash flow statement okay so we're going to do the same for accounts receivable so accounts receivable will be the next item here and the amounts there are going to be the 7718515 we'll subtract this out equals this number minus this number now again that one of course went from went down so this is a debit and credit and it went down with that item so then we're going to go to inventory so inventory we have here it's going to be the 246 and the 257 we'll subtract those out this number minus this number equals uh this sale c5 minus d5 and that'll give us the 10100 and then we'll go to prepaid expense prepaid expenses 15117 subtract those out now if this something that goes goes wrong we're not in balance that's okay because we're going to sum this up just as we will with any kind of trial balance and go fix any problems that we have so if I mess something up then I'll go back and fix it here so there we have that now we're going to skip the total current assets we don't need this that's that's we're going to put it back into a plus and minus or a debit and credit format from a plus and minus format so the next component is going to be equipment so it's within property plans and equipment equipment and that's going to be the 262 250 and the 200 and we'll so now excel starting to remember the formula and it did it for me there so I just did the the math there which is nice I'll let excel do that and so then we got accumulated depreciation so we'll pull this over now this is going to be a bit tricky note that here it's a positive number but over here it's going to be a credit because it's a contra asset so we're going to have to do that conversion again so I'm going to represent credits with a negative number here so that it'll be debits minus the credit will equal zero and that'll be our check figure so this is going to be 110 750 and this is going to be a credit negative 95 and now we'll do the same math it's subtracting these two out we can see from this year to this year of course it went up but it went up in the credit direction so we just got to get we got to get used to the which way things are going and there's no getting around that when we're working with debits and credits or the math of plus and minus we got to know which way things are going either using the accounting equation or debits and credits it's easier once we set up the system to do it this way with debits and credits within excel because then everything will kind of go the same way and hopefully I'll you know be able to prove that to you as we go and then I've tried to abbreviate uh accumulated depreciation here our next item if we scroll down we're going to skip these subtitles again no subtotal no liabilities no current liabilities we're going to go down to accounts payable so accounts payables are next item and we'll tap through there and we're going to pick up this uh credit once again 1750 so we're picking up this flipping the sign because it's a liability which has a credit and a credit of 102 and so if we subtract those out we get the 100,250 so again it went way down but it went down in the debit direction so the difference is decreased in the debit direction then we've got short term notes payable so short term notes payable our next item and once again that's going to be a liability so it's credit 15,010 so there we have that difference of 14 it went from 1,000 up to 14 increase in the credit direction and then we're not going to have the current liabilities we're going to have the total current liabilities is a subtotal and then long term notes payable so we want long term notes payable your next item and if we scroll through here the long term is going to be 100 credit 100,000 and credit 775 and the difference being the 225 and then again we're not going to put total liabilities we're going to go down to equity now so we want common stock so that's going to be our next item common stock and that's going to be a credit 215 and 200 so 215 and 200 and it's a credit 2 because it's an equity account and then we got paid in capital so let's just call it paid in capital and we're going to say that that's going to be for the 30,000 and zero so that's an increase of 30,000 that's also a credit balance accounts and then of course retained earnings retained earnings now here's where things going to get a little bit tricky if i put the retained earnings here that's on the balance sheet of course 230 and 125 credit 230,000 and 125 credit 125 then you would think we should be in balance there so we're out of balance right now let's go back through i'm going to check and see where the problem is so i'm just going to go through these and check these off and note if i get down to accounts payable here there's where the problem is and that's the point of putting into a debit and credit format we have the double entry accounting system it's going to tell us something's wrong there and i have another seven i missed a seven so i'm just going to double click add a seven so now this one is in balance now we'll take a look at the 9,500 and there's a similar thing here where we got the short term notes payable short term notes payable should be the 10,000 it's here 1,000 so that's the point of the double entry accounting system we're going to put a zero and that is going to help us to make sure that our worksheet here is going to be in balance so now we're looking for another 500 we're off 500 and that's going to be our retained earnings so retained earnings was 225 500 so i'm just going to double click here and add that 500 okay so that gives us something in balance that gives us a pretty good indication that our worksheet is working now now we're going to add one more twist to this worksheet this is what we would use in an indirect method we're going to add one more twist here because what we want to do is break out this retained earnings because when we look at into the income statement components of it because we're going to use those temporary accounts in order to create the the operating section of the statement of cash flows so again this is another way that we're going to kind of have to deconstruct these financial statements back to a trial balance so that we have a worksheet that's easiest to use and that's a good practice for us so how do i get that i mean how can i put this income statement into my worksheet i want to see the income statement just for 2000 x 5 not for 2000 x 4 because the income statement was closed out to retained earnings and that's fine but we want to see the activity in 2000 x 5 this 230 000 of retained earnings is kind of lumping in all the activity that happened on the income statement and that's kind of fine for the indirect method where we're going to kind of back into the activity using net income but for the direct method it would be nice to see the line items for the income statement so how can we do that well retained earnings if this is retained earnings at the end of last time period then that should be the beginning balance at the end of this time period so we're basically going to be kind of deconstructing the statement of owner's equity here we're going to say well this would be the retained earnings in the post closing trial balance which means that at the beginning of the year it would have been at the same balance at the end of the prior year so this 230 000 if i make this 125 000 and then i just add the income statement accounts that i'm just going to add these accounts which is the detail to the equity section because this 158 100 was closed out to retained earnings and i closed out any dividends which we're saying here there were dividends of 50 53 600 that's what would be constructing the retained earnings so in practice of course what we could do is look at retained earnings the gl see if there's any activity other than the closing out of net income at the end of the time period such as dividends and then we're going to and then we would break that out we can break that out in our worksheet so that's what we're going to do we're going to put the dividends first and say say we're out of balance but i should be able to reconstruct this 104 500 with the temporary accounts so we're going to start with dividends that's a debit balance account a contra equity account 53 600 and then we'll just go through the income statement so i'm just going to go through the income statement add the income statement accounts so all i'm doing is sales cost gets sold depreciation other expenses loss income before taxes income taxes we should get to that 158 100 so i'm just going to add these numbers here now so i'm just adding those numbers which was a credit for sales 1185 cost gets sold 595 386 and 362 850 to 128 350 and there we have it so if we look at the debits and credits the sales minus or minus all the expenses is going to give us 158 100 here 158 100 so there's net income and then we have the the draws and of course now we're back in balance so that's what we're looking for and now we're just going to carry this formula down it didn't finish this formula because excel didn't see the other side of it so it didn't predict that that's what we want as it has been doing so now we're just going to continue the same thing we're just going to say this equals this number minus this number just as we've been doing all the way down and we can just copy this down so i'm going to put my cursor on autofill and just autofill this all the way down so there we have that now we're just subtracting these out all the way down and that's what we're going to have here so the only confusing thing about this worksheet or there's a few confusing things but we're we're basically making the financial statements and like i said deconstructing them to back to a trial balance and we're taking the balance sheet as we do for a indirect method and making it into a trial balance just with the balance sheet like a post closing trial balance but now we're we're basically reconstructing the adjusted trial balance here by by then by then breaking out the temporary accounts now of course if we had when if we had the adjusted trial balance if we used that to create the financial statements we could then use that or if we just have the financial statements before then we can recreate it which is a good practice to do anyways because again it kind of makes us go the other way to deconstruct the financial statements so now we're going to have this this is going to be our tool now that we're going to use to create the statement of cash flows and we'll discuss how to go through that we're going to go through those in a kind of a step by step process we'll do these cash flows from operations then from investing activities and then financing activities