chapter twenty-five
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CHAPTER TWENTY-FIVE
STATEMENT OF CASH FLOWS
STATEMENT OF CASH FLOWS
Purpose: To provide information about how cash was generated and used during the period
Divides cash related activities into three categories:o Operating Activities
o Investing Activities
o Financing Activities
OPERATING ACTIVITIES
Transactions and events associated with:
• selling a product or providing a service
• the revenues and expenses reported on the Income Statement
Represent the company’s primary source of cash over the life of the business
INFLOW EXAMPLES
Cash receipts from the sale of goods or services
Interest received on loans made to outside entities
Dividends received on investments made in the stock of other companies
OPERATING ACTIVITIES
Transactions and events associated with:
• selling a product or providing a service
• the revenues and expenses reported on the Income Statement
Represent the company’s primary source of cash over the life of the business
OUTFLOW EXAMPLES
Payments for the acquisition of inventoryPayments to employees and the government
Payments for interest on loans
Payments to other suppliers and for other expenses
CASH FLOWS FROM OPERATING ACTIVITIES
TWO METHODS:o DIRECT
• Revenues and expenses are adjusted
– to reflect the amount of cash received or paid for each item
o INDIRECT• Net income is adjusted
– for transactions that affect net income, but have no effect on cash flows
INVESTING ACTIVITIES
Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principalon the related loans
INFLOW EXAMPLESProceeds from:
collection of principal on loans made
sale of property, plant and equipment; intangibles; and other productive assets
sale of investments in debt and equity securities
discounting notes receivable
INVESTING ACTIVITIES
Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principal on the related loans
OUTFLOW EXAMPLES
Loans made to other parties
Payments to acquire property, plant, and equipment; intangibles; and other productive assets
Payments to acquire investments in debt and equity securities
FINANCING ACTIVITIES
Transactions dealing with the exchange of cash between the company and its owners and creditors
INFLOW EXAMPLES
•Proceeds from additional investments by the owners or the issuance of stock
•Proceeds from borrowing money through the signing of a mortgage, issuing a bond or other long- or short-term loans
FINANCING ACTIVITIES
Transactions dealing with the exchange of cash between the company and its owners and creditors
OUTFLOW EXAMPLES
•Payments of dividends to stockholders or withdrawals by the owners
•Payments to purchase treasury stock
•Repayment of the principal on loans
STATEMENT OF CASH FLOWS
EXAMPLE: Simplex Company has prepared its Income Statement, Statement of Retained Earnings and Balance Sheet for 20-3.
Now it needs to prepare itsStatement of Cash Flows.
Comparative Balance Sheet
160,000$ 90,000
Simplex Company
December 31, 20-3 and 20-2
Assets20-3 20-2
Increase (Decrease)
Current Assets:CashAccounts ReceivableMerchandise Inventory
Total current assets
Property, Plant and Equipment:LandBuildingEquipment
Total property, plant and equip.Total assets
$ 200,000 $(110,000)190,000 (30,000)
180,000 200,000 (20,000)$430,000 $590,000 (160,000)
$ 40,000 $ 40,000 0140,000 0 140,000100,000 0 100,000
$ 280,000 $ 40,000 $240,000$ 710,000 $ 630,000 $ 80,000
The Statement of Cash Flows willexplain how the cash account
decreased by $110,000 in 20-3.
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
The revenues and expenses from theIncome Statement are used in computing the
“Cash Flow Generated from Operating Activities.”
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
We’ll start with the Sales…Sales (revenues) are recognized when earned,
regardless of the amount of cash actually received.Sales must be converted to the amount of
“Cash Received from Customers.”
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
To convert Sales into the“Cash Received from Customers” we need
to examine the Accounts Receivable account.
$190,000Beg. balance
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
Sales increases theAccounts Receivable
account.
$190,000Beg. balance
Sales
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts Receivable is decreasedby customers making payments.
$190,000Beg. balance
?Sales
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
$190,000Beg. balance
?
$160,000End. balance
Accounts Receivabledecreased by $30,000
during 20-3.
Sales
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
$190,000Beg. balance
?
$160,000End. balance
When Accounts Receivable decreases…Cash rec’d from customers > Sales
Sales
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
$190,000Beg. balance
?
$160,000End. balance
Sales for the year were $900,000…
$900,000
CASH RECEIVED FROM CUSTOMERS
ACCOUNTS RECEIVABLE
$190,000Beg. balance
$160,000End. balance
Cash Rec’d from Customers = Sales + Decrease in A/R
$900,000 + $30,000
$900,000 $930,000
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Cash Received from Customers.
$ 930,000$30,000
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Cost of Goods Soldis adjusted next….
$ 930,000$30,000
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
We need to determine the amountof merchandise purchased during the year.
$200,000Beg. balance
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
Purchases increase inventory.
$200,000Beg. balance
?
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
Selling goods (merchandise)reduces inventory.
$200,000Beg. balance
? Cost of Goods Sold
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
Inventory decreased by $20,000 during 20-3.
$200,000Beg. balance
? Cost of Goods Sold
$180,000End. balance
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
When inventory decreases during the year…..Cost of Goods Sold > Purchases
$200,000Beg. balance
? Cost of Goods Sold
$180,000End. balance
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
$200,000Beg. balance
?
$180,000End. balance
$600,000
Cost of Goods Sold for 20-3 is $600,000.
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
$200,000Beg. balance
$180,000End. balance
$600,000
Purchases for 20-3 =Cost of Goods Sold - decrease in Merch. Inventory
$600,000 - $20,000
$580,000
CASH PAID FOR MERCHANDISE
MERCHANDISE INVENTORY
$200,000Beg. balance
$180,000End. balance
$600,000$580,000
Cost of merchandise purchased.
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Decrease in Merchandise Inventory
$ 930,000 $(20,000)
$30,000
CASH PAID FOR MERCHANDISE
ACCOUNTS PAYABLE
$180,000 Beg. balance
$120,000 End. balance
Now that we know Simplex’ purchases,we need to determine how much cash
was paid for these goods.
CASH PAID FOR MERCHANDISE
ACCOUNTS PAYABLE
$180,000 Beg. balance
$120,000 End. balance
Purchases increase Accounts Payable and cashpayments on these purchases decrease Accts. Payable.
$580,000?
CASH PAID FOR MERCHANDISE
ACCOUNTS PAYABLE
$180,000 Beg. balance
$120,000 End. balance
Accounts Payable decrease by $60,000 during 20-3,Purchases < Cash paid
$580,000?
CASH PAID FOR MERCHANDISE
ACCOUNTS PAYABLE
$180,000 Beg. balance
$120,000 End balance
Cash paid for merchandise =Purchases + decrease in Accounts Payable
$580,000 + $60,000
$580,000$640,000
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Decrease in Accounts Payable
$ 930,000 $(20,000)$ 640,000
$30,000$60,000
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Operating Expenses are generallyadjusted for prepaid expenses,
accrued liabilities, and depreciation.
$ 930,000 $(20,000)$ 640,000
$30,000$60,000
Schedule for the Calculation of Cash Generated from Operating Activities
600,000$ 900,000
Simplex Company
For Year Ended December 31, 20-3
Income Statement Additions DeductionsCash Flow
SalesCost of Goods SoldGross ProfitOperating ExpensesNet Income
220,000$ 300,000
$ 80,000
Simplex does not have any ofthese items , so there is no needto adjust operating expenses.
$ 930,000 $(20,000)$ 640,000
220,000
$30,000$60,000
Cash flows from operating activities:Cash received from customers
$(640,000)$930,000
Simplex CompanyStatement of Cash Flows
For Year ended December 31, 20-3
Cash paid for merchandiseCash paid for operating expenses (220,000)
Total cash disbursed for operating act. (860,000)$ 70,000Net cash provided by operating activities
Cash flows from investing activities:
Now that the operating sectionis completed, we turn our
attention to the investing section.
Comparative Balance Sheet
160,000$ 90,000
Simplex Company
December 31, 20-3 and 20-2
Assets20-3 20-2
Increase (Decrease)
Current Assets:CashAccounts ReceivableMerchandise Inventory
Total current assets
Property, Plant and Equipment:LandBuildingEquipment
Total property, plant and equip.Total assets
$ 200,000 $(110,000)190,000 (30,000)
180,000 200,000 (20,000)$430,000 $590,000 (160,000)
$ 40,000 $ 40,000 0140,000 0 140,000100,000 0 100,000
$ 280,000 $ 40,000 $240,000$ 710,000 $ 630,000 $ 80,000
Investing activities involve the purchaseand sale of Plant Assets.
INVESTING ACTIVITIES
BUILDING$ 0Beg. balance
$140,000End balance
Beg. balance $ 0
$100,000End balance
EQUIPMENT
Simplex Company informs us the only activity inthe building and equipment accounts in 20-3
was the purchase of a building and equipmentfor cash, just before year end.
Cash flows from operating activities:Cash received from customers
$(640,000)$930,000
Simplex CompanyStatement of Cash Flows
For Year ended December 31, 20-3
Cash paid for merchandiseCash paid for operating expenses (220,000)
Total cash disbursed for operating act. (860,000)$ 70,000Net cash provided by operating activities
Cash flows from investing activities:
On to the Financing section...
Purchased building $(140,000)Purchased equipment (100,000)
(240,000)Net cash used by investing activities
Cash flows from financing activities:
Comparative Balance Sheet
160,000$ 90,000
Simplex Company
December 31, 20-3 and 20-2
Assets20-3 20-2
Increase (Decrease)
Current Assets:CashAccounts ReceivableMerchandise Inventory
Total current assets
Property, Plant and Equipment:LandBuildingEquipment
Total property, plant and equip.Total assets
$ 200,000 $(110,000)190,000 (30,000)
180,000 200,000 (20,000)$430,000 $590,000 (160,000)
$ 40,000 $ 40,000 0140,000 0 140,000100,000 0 100,000
$ 280,000 $ 40,000 $240,000$ 710,000 $ 630,000 $ 80,000
Financing activities involve exchangesof cash between the company and
its stockholders and creditors.
120,000$ 60,000
LiabilitiesCurrent liabilities:
Notes PayableAccounts Payable
Total liabilities
Stockholders’ EquityCommon Stock $5 par, 100,000
shares auth.; Issued 58,000
Paid-in-capital in excess of par-
$ 50,000 $ 10,000
50,000
(60,000)$180,000
100,000
(50,000)$230,000
$250,000$290,000 40,000
130,000 30,000110,000
130,000$ 530,000$ 630,000$ 710,000$ 400,000
$ 80,000
180,000
in 20-3, 50,000 in 20-2
common stockRetained Earnings
Total liab. & stockholders’ equity
60,000Total stockholders’ equity
Let’s begin by analyzingthe cash related activities
in the Notes Payable account.
FINANCING ACTIVITIES
NOTES PAYABLE
$ 50,000 Beg. balance
$ 60,000
$10,000 increase in 20-3from issuing a note.
$10,000
Cash flows from operating activities:Cash received from customers
$(640,000)$930,000
Simplex CompanyStatement of Cash Flows
For Year ended December 31, 20-3
Cash paid for merchandiseCash paid for operating expenses (220,000)
Total cash disbursed for operating act. (860,000)$ 70,000Net cash provided by operating activities
Cash flows from investing activities:Purchased building $(140,000)Purchased equipment (100,000)
(240,000)Net cash used by investing activities
Cash flows from financing activities:Issued Note Payable $ 10,000
120,000$ 60,000
LiabilitiesCurrent liabilities:
Notes PayableAccounts Payable
Total liabilities
Stockholders’ EquityCommon Stock $5 par, 100,000
shares auth.; Issued 58,000
Paid-in-capital in excess of par-
$ 50,000 $ 10,000
50,000
(60,000)$180,000
100,000
(50,000)$230,000
$250,000$290,000 40,000
130,000 30,000110,000
130,000$ 530,000$ 630,000$ 710,000$ 400,000
$ 80,000
180,000
in 20-3, 50,000 in 20-2
common stockRetained Earnings
Total liab. & stockholders’ equity
60,000Total stockholders’ equity
We will move now tothe Capital Stock accounts.
INVESTING ACTIVITIES
COMMON STOCK
$250,000 Beg. balance
$290,000 End balance
Beg. balance
$ 100,000
$130,000 End balance
PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK
The only types of transactionsthat increase or decrease
the Capital Stock accounts areissuing and retiring stock.
INVESTING ACTIVITIES
COMMON STOCK
$250,000 Beg. balance
$290,000 End balance
Beg. balance
$ 100,000
$130,000 End balance
PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK
Since Common Stock increasedduring 20-3, stock with parvalue of $40,000 was issued.
$40,000
INVESTING ACTIVITIES
COMMON STOCK
$250,000 Beg. balance
$290,000 End balance
Beg. balance
$ 100,000
$130,000 End balance
PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK
Since Paid-In Capital increasedduring 20-3, stock was issued for a price
$30,000 above the par value.
$40,000 $30,000
Cash flows from operating activities:Cash received from customers
$(640,000)$930,000
Simplex CompanyStatement of Cash Flows
For Year ended December 31, 20-3
Cash paid for merchandiseCash paid for operating expenses (220,000)
Total cash disbursed for operating act. (860,000)$ 70,000Net cash provided by operating activities
Cash flows from investing activities:Purchased building $(140,000)Purchased equipment (100,000)
(240,000)Net cash used by investing activities
Cash flows from financing activities:Issued Note Payable $ 10,000Issued Common Stock 70,000
120,000$ 60,000
LiabilitiesCurrent liabilities:
Notes PayableAccounts Payable
Total liabilities
Stockholders’ EquityCommon Stock $5 par, 100,000
shares auth.; Issued 58,000
Paid-in-capital in excess of par-
$ 50,000 $ 10,000
50,000
(60,000)$180,000
100,000
(50,000)$230,000
$250,000$290,000 40,000
130,000 30,000110,000
130,000$ 530,000$ 630,000$ 710,000$ 400,000
$ 80,000
180,000
in 20-3, 50,000 in 20-2
common stockRetained Earnings
Total liab. & stockholders’ equity
60,000Total stockholders’ equity
The final account to beanalyzed is Retained Earnings.
Retained Earnings, January 1, 20-3Net Income $ 80,000
$ 50,000
Simplex CompanyStatement of Retained EarningsFor Year ended December 31, 20-3
Less dividendsNet increase in retained earnings
20,000
Retained Earnings, December 31, 20-360,000
$110,000
The Statement of Retained Earningsprovides us with a summary ofall the activity in the account.
Retained Earnings, January 1, 20-3Net Income $ 80,000
$ 50,000
Simplex CompanyStatement of Retained EarningsFor Year ended December 31, 20-3
Less dividendsNet increase in retained earnings
20,000
Retained Earnings, December 31, 20-360,000
$110,000
The Net Income has already beenanalyzed for cash activities….
But dividends involve the paymentof cash and therefore must be recorded
on the Statement of Cash Flows.
Cash flows from financing activities:
Paid cash dividends60,000Net cash provided by financing activities
Issued Note Payable $ 10,000Issued Common Stock 70,000
(20,000)
Net increase in cash $(110,000)
OperatingInvestingFinancing
$ 70,000(240,000)
60,000$(110,000)
Cash flows from financing activities:
Paid cash dividends60,000Net cash provided by financing activities
Issued Note Payable $ 10,000Issued Common Stock 70,000
(70,000)
Net increase in cash Cash balance, January 1, 20-3 200,000Cash balance, December 31, 20-3
What about more complex companies?
$(110,000)
$ 90,000
Comparative Balance Sheet
1,800$ 22,980
Multiplex Company
December 31, 20-2 and 20-1
Assets20-2 20-1
Increase (Decrease)
Current Assets:CashGovernment notesAccrued interest receivable
Total current assetsSupplies and prepayments
Property, plant and equipmentStore equipmentLess accumulated depreciation
$ 20,000 $ 2,9803,200 (1,400)
100 300 (200)
4,000 2,750(2,930)
$153,665 $145,260
9,200$ 48,000(14,000) 4,000
Accounts Receivable (net) 60,215 51,510 8,705Merchandise inventory 64,570 67,500
1,2508,405
$ 38,800(18,000)
Delivery equipment $ 45,000 $ 32,000 13,000Less accumulated depreciation (12,500) ( 8,000) 4,500
Step #1Compute the change in
cash and cash equivalents.
CASH AND CASH EQUIVALENTSTo qualify as a cash equivalent:
•an investment must be readily convertible to a known amount of cash
These are considered the same as cash when preparing the statement of cash flows
20-1
Cash
Gov’t Notes
$20,000
3,200$23,200
20-2
$22,980
1,800$24,780
$1,580 increase
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
Step #2 Prepare a schedule to calculatecash from operating activities.
Interest revenue 155Interest expense 650Net Income $ 44,755
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250Increase in
Accounts Receivable
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250 Decrease in Inventory….purchased less than what
was sold
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930)
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250 Decrease in Accounts Payable...paid for more than what
was purchased
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930) $11,400
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
Operating expensesinvolve many accounts.
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930)$11,400 278,570$ 172,825
OPERATING EXPENSES
SUPPLIES AND PREPAYMENTS$2,750Beg. Balance
$4,000End Balance
Supplies purchased and prepayments made
OPERATING EXPENSES
SUPPLIES AND PREPAYMENTS$2,750Beg. Balance
$4,000End Balance
Supplies and prepaymentsconsumed (Operating Expenses)
OPERATING EXPENSES
SUPPLIES AND PREPAYMENTS$2,750Beg. Balance
$4,000End Balance
$1,250 Increase indicates more werepurchased (paid) than were consumed (expensed).
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930)$11,400
1,250
278,570$ 172,825
OPERATING EXPENSES
Multiplex informs us that Depreciation Expense of $10,400 is included in the Operating Expenses reported on the Income Statement.
Depreciation does not use or provide cash…therefore it should be subtracted fromOperating Expenses on our schedule.
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930) $11,400
1,250 (10,400)
278,570$ 172,825
OPERATING EXPENSES
Beg. Balance
End Balance
$1,520
$ 950
ACCRUED AND WITHHELD PAYROLL TAXES
The $570 decrease indicates morewas paid than expensed.
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930)$11,400
1,250 (10,400)570
278,570
136,170
$ 172,825
$ 36,655
Let’s analyze theInterest Revenue
account.
INTEREST REVENUE
Beg. Balance
End Balance
$300
$ 100
INTEREST RECEIVABLE
The $200 decrease indicates morewas received than earned this period.
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930) $11,400
1,250 (10,400)570
278,570
136,170
$ 172,825
$ 36,655 200 355
Interest Expense is thefinal account to be analyzed.
INTEREST EXPENSE
Beg. Balance
End Balance
$ 80
$ 100
INTEREST PAYABLE
The increase indicates all but $20 of this year’s Interest Expense
was paid.
Income Statement
270,100$ 460,000
Multiplex Company
For Year Ended December 31, 20-2
Income Statement Additions DeductionsCash Flow
Net SalesCost of Goods SoldGross ProfitOperating Expenses
Operating Income
144,750$ 190,000
$ 45,250
$(8,705) $ 451,395
Interest revenue 155Interest expense 650Net Income $ 44,755
(2,930)$11,400
1,250 (10,400) 570
278,570
136,170
$ 172,825
$ 36,655200 355
(20) 630$ 36,380
Cash flows from operating activities:Cash received from customers
355$451,395
Multiplex CorporationStatement of Cash Flows
For Year ended December 31, 20-2
Cash paid for merchandiseCash provided by operating activities
Cash paid for merchandise $(278,570)$451,750
Cash paid for operating expensesInterest paid
Total cash disbursed for oper. activities (415,370)
(136,170)(630)
Net cash provided bv operating activities $ 36,380Cash flows from investing activities:
INVESTING ACTIVITIES
Bal.
Bal.
$ 34,000
$ 38,000
OFFICE EQUIPMENT
$ 48,000
$ 38,800Bal.
Bal.
STORE EQUIPMENT
Multiplex informs us the only equipmenttransactions were the purchases
of new equipment for cash.
INVESTING ACTIVITIES
Bal.
Bal.
$ 34,000
$ 38,000
OFFICE EQUIPMENT
$ 48,000
$ 38,800Bal.
Bal.
STORE EQUIPMENT
Cash paid forequipment
9,200 4,000
Cash flows from operating activities:Cash received from customers
355$451,395
Multiplex CorporationStatement of Cash Flows
For Year ended December 31, 20-2
Cash paid for merchandiseCash provided by operating activities
Cash paid for merchandise $(278,570)$451,750
Cash paid for operating expensesInterest paid
Total cash disbursed for oper. activities (415,370)
(136,170)(630)
Net cash provided bv operating activities $ 36,380Cash flows from investing activities:
Purchased store equipmentPurchased office equipment
$ (9,200)(4,000)
INVESTING ACTIVITIES
Beg. Balance
End Balance
$ 32,000
$ 45,000
DELIVERY EQUIPMENT
Purchase of newequipment in
exchange for a note.
13,000
INVESTING ACTIVITIES
Beg. Balance
End Balance
$ 32,000
$ 45,000
DELIVERY EQUIPMENT
Since this transaction does not involvecash, it will not be shown on the
Statement of Cash Flows.
13,000
Cash flows from operating activities:Cash received from customers
355$451,395
Multiplex CorporationStatement of Cash Flows
For Year ended December 31, 20-2
Cash paid for merchandiseCash provided by operating activities
Cash paid for merchandise $(278,570)$451,750
Cash paid for operating expensesInterest paid
Total cash disbursed for oper. activities (415,370)
(136,170)(630)
Net cash provided bv operating activities $ 36,380Cash flows from investing activities:
Purchased store equipmentPurchased office equipment
$ (9,200)(4,000)
(13,200)Net cash used bv investing activitiesCash flows from financing activities:
FINANCING ACTIVITIES
Bal.
Bal.
$ 39,000
$ 40,000
PAID-IN CAPITAL
$ 100,000
$ 98,000COMMON STOCK
Multiplex issued additionalshares of stock for $3,000.
2,000 1,000
Bal.
Bal.
Cash flows from operating activities:Cash received from customers
355$451,395
Multiplex CorporationStatement of Cash Flows
For Year ended December 31, 20-2
Cash paid for merchandiseCash provided by operating activities
Cash paid for merchandise $(278,570)$451,750
Cash paid for operating expensesInterest paid
Total cash disbursed for oper. activities (415,370)
(136,170)(630)
Net cash provided bv operating activities $ 36,380Cash flows from investing activities:
Purchased store equipmentPurchased office equipment
$ (9,200)(4,000)
(13,200)Net cash used bv investing activitiesCash flows from financing activities:
Issued common stock $ 3,000
Multiplex informs usthat cash dividends
of $22,800 were paidin 20-2.
Cash flows from financing activities:Issued Common Stock $ 3,000Paid cash dividends (22,800)
INVESTING ACTIVITIES
Beg. Balance
End. Balance
$ 11,800
$ 10,000
NOTES PAYABLE
Cash was paid to reduce theNotes Payable balance.
1,800
Cash flows from financing activities:Issued Common Stock $ 3,000Paid cash dividends (22,800)Retired note payable (1,800)
Net cash used bv financing activities (21,600)$ 1,580Net increase in cash and cash equivalents
Cash and cash equivalents, January 1, 20-2Cash and cash equivalents, December 31, 20-2
23,200$24,780
Schedule of noncash investing and financing activities:
Non-cash investing and financing activitiesare activities that involve no cash flow,
but represent a significant changein the company’s financial position.
Cash flows from financing activities:Issued Common Stock $ 3,000Paid cash dividends (22,800)Retired note payable (1,800)
Net cash used bv financing activities (21,600)$ 1,580Net increase in cash and cash equivalents
Cash and cash equivalents, January 1, 20-2Cash and cash equivalents, December 31, 20-2
23,200$24,780
Schedule of noncash investing and financing activities:
Multiplex had one such transaction…The issuance of a note payable to purchase
new Delivery Equipment.
Acquired delivery equip. by issuing a note
INTERPRETING THE STATEMENT
Most important indicator of financial health of a business is “Net cash used or provided by operating activities”o Positive cash flows are needed to purchase
property, plant and equipment. • This could be done through borrowing but loans
must be repaid.
• This could be done through issuance of stock but dividends have to be paid.
o Chronic inability to generate positive cash flows is a sure sign of financial instability.
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