7/29/2019 Inst 16
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INSTRUCTIONS FOR UNIT #16
~ In Unit # 15 you prepared the classified balance sheet
presenting the financial
statement of the accounts at a point in time, e.g. the end of
the year.
~ We'll now do the Statement of Cash Flow. This statement will
show where the cashcame from and where it went, i.e. how it was
used. A company's cash derives from its
normal operations, the sale of stock, or through borrowing. It
applies that cash to pay the
expenses of normal operations, invest in equipment, build its
assets, retire debt, or paydividends, etc. That "flow" of cash is
critical to the life of the business. Accordingly, the
statement of cash flow was developed to "model" or "see" it.
There are three categories
to the statement, namely, operating, investing, and financing.
Operating is the normalday to day buying and selling of inventory,
paying expenses, etc. Investing is the
acquisition or disposal of long term assets, e.g. land,
buildings, machinery, equipment.
Financing is issuing stock, or borrowing to obtain capital, and
paying dividends.
~ To show how this works, we'll work with the income statement
and balance sheet dataused in the previous tutorial.
~ Start with Tutorial # 16 Initial. On the left, you will see a
listing of various accounts.
On the right are beginning and ending balances for some of them.
To assist you, some
numbers have been entered.
~ On the right, enter these numbers in the cells for beginning
and ending:
Beginning Ending~ Accounts receivable change 100 200
~ Inventory change 200 300
~ Accounts payable change 50 25~ Accrued expense payable 30 130~
Wages payable 10 5
~ Salaries payable 20 120
~ Prepaid insurance 30 20~ Supplies 50 25
~ Income taxes payable 10 60
~ Buildings and equipment 200 250~ Proceeds from preferred stock
150 150
~ Proceeds from common stock 100 200
~ Proceeds (payment) notes payable 100 125
~ Dividends payable 10 40
As you do this, notice how the number is posted on the left in
the appropriate column.
This is to demonstrate the impact on cash.
7/29/2019 Inst 16
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INSTRUCTIONS FOR UNIT
The increase ordecrease is looked at in terms of how it affects
cash, i.e. does it increaseit or decrease it. For example, if
receivables go up, you have less cash. A sale was made,
but you do not have the cash. If inventory increases, you have
to pay for it, however, did
you pay for it this period or will you pay for it in the future.
Therefore, if accountspayable increases, you will pay for it later,
if accounts payable decreases, you pay for it
now. Another example would be prepaid insurance. If you prepay
insurance, you're using
cash; if you prepay less, you are not using cash. Again, each
account is looked at in termsof using more or less cash, or
generating more or less cash. That is why it is necessary to
know the change in accounts and how it impacts cash flow.
~ On the left, enter these numbers in the appropriate cell next
to the account:
~ Sales 1,000
~ Cost of sales -600
~ Operating expenses, this includes:Wages = 50, salaries = 100,
utilities =
50, rent = 50, supplies expense = 25, andinsurance expense = 10;
total = -285
~ Income tax expense -50
~ Dividends -30
~ As you do this, the cash flow will be calculated. On the left,
you will see subtotals for
each category, and the grand total, called net cash flow. Look
carefully at:
~ Cash from sales~ Cash payments for merchandise
~ Cash payments for operating~ Cash for investing~ Cash from
financing
~ Each of these categories is designed to show the user of the
statement the source anduses of cash during the year.
~ The Tutorial titled Tutorial # 16 Completed has the correct
entries.
