CHAPTER 4
STRUCTURE OF THE BALANCE SHEET
&
STATEMENT OF CASH FLOWS
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts

A. There are three basic elements
of the balance sheet:
Assets = Liabilities + Owners’ Equity
1. Assets are the probable
future economic benefits
obtained or controlled by
an entity as a result of past transactions or
events.

Ch4-2
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts

A. There are three basic elements
of the balance sheet:
Assets = Liabilities + Owners’ Equity
2.
Liabilities are probable future
sacrifices arising from present
obligations to transfer assets or
provide services to other entities
as a result of past transactions or
events.
Ch4-3
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts

A. There are three basic elements
of the balance sheet:
Assets - Liabilities = Owners’ Equity
3. Equity is the residual interest in the
assets of an entity that remains after
deducting its liabilities.
Ch4-4
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
 A. There are three basic elements of
the balance sheet:
Assets = Liabilities + Owners’ Equity
4.
Generally accepted accounting principles
(GAAP) balance sheet carrying amounts are a
mixture of :
- historical costs
- current costs (also called fair value)
- net realizable value, and
- discounted present values.
Ch4-5
Horizontal Analysis
Horizontal analysis, also called trend analysis, is a
technique for evaluating a series of financial
statement data over a period of time.
Its purpose is to determine the increase or decrease
that has taken place.
Horizontal analysis is commonly applied to the balance
sheet, income statement, and statement of retained
earnings.
LO 3 Explain and apply horizontal analysis.
Horizontal Analysis
Exercise: The comparative condensed balance sheets of
Ramsey Corporation are presented below.
Current assets
PP&E
Intangibles
Total assets
2009
$ 76,000
99,000
25,000
$ 200,000
2008
$ 80,000
90,000
40,000
$ 210,000
Current liabilities
Long-term liabilties
Stockholders' equity
Total liabilities & equity
$ 40,800
143,000
16,200
$ 200,000
$ 48,000
150,000
12,000
$ 210,000
Instructions: Prepare a horizontal analysis of the balance
sheet data for Ramsey Corporation using 2008 as a base.
LO 3 Explain and apply horizontal analysis.
Horizontal Analysis
Exercise: The comparative condensed balance sheets of
Ramsey Corporation are presented below.
Current assets
PP&E
Intangibles
Total assets
2009
$ 76,000
99,000
25,000
$ 200,000
2008
$ 80,000
90,000
40,000
$ 210,000
Current liabilities
Long-term liabilties
Stockholders' equity
Total liabilities & equity
$ 40,800
143,000
16,200
$ 200,000
$ 48,000
150,000
12,000
$ 210,000
Increase Percentage
(Decrease)
Change
$ (4,000)
-5.0%
9,000
10.0%
(15,000)
-37.5%
$ (10,000)
-4.8%
$ (7,200)
(7,000)
4,200
$ (10,000)
-15.0%
-4.7%
35.0%
-4.8%
Instructions: Prepare a horizontal analysis of the balance
sheet data for Ramsey Corporation using 2008 as a base.
LO 3 Explain and apply horizontal analysis.
Vertical Analysis
Vertical analysis, also called common-size analysis, is
a technique that expresses each financial statement
item as a percent of a base amount.
On an income statement, we might say that selling
expenses are 16% of net sales.
Vertical analysis is commonly applied to the balance
sheet and the income statement.
LO 4 Describe and apply vertical analysis.
Vertical Analysis
Exercise: The comparative condensed income statements
of Hendi Corporation are shown below.
Net sales
Cost of goods sold
Gross profit
Operating expense
Net income
2009
Amount
$ 600,000
483,000
117,000
57,200
$ 59,800
2008
Amount
$ 500,000
420,000
80,000
44,000
$ 36,000
Instructions: Prepare a vertical analysis of the income
statement data for Hendi Corporation in columnar form
for both years.
LO 4 Describe and apply vertical analysis.
Vertical Analysis
Exercise: The comparative condensed income statements
of Hendi Corporation are shown below.
Net sales
Cost of goods sold
Gross profit
Operating expense
Net income
2009
Amount
Percent
$ 600,000
100.0%
483,000
80.5%
117,000
19.5%
57,200
9.5%
$ 59,800
10.0%
2008
Amount
Percent
$ 500,000
100.0%
420,000
84.0%
80,000
16.0%
44,000
8.8%
$ 36,000
7.2%
Instructions: Prepare a vertical analysis of the income
statement data for Hendi Corporation in columnar form
for both years.
LO 4 Describe and apply vertical analysis.
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
B. The balance sheet provides information
for assessing:
- rates of return
- capital structure
- liquidity
- solvency, and
-financial flexibility.
Ch4-12
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
B. The balance sheet provides information for
assessing:
1. Rates of return measures are used to evaluate
operating efficiency and profitability.

a. Two common returns measures are return on assets
(ROA) and return on common equity (ROCE).

b. By comparing ROA to ROCE, users can gain insight into
whether leverage (e.g., debt financing) is enhancing the
return earned by shareholders.

Ch4-13
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
B. The balance sheet provides information
for assessing:
2. Capital structure is the relative proportion of
financing for assets that comes from debt or
equity sources.
An important decision in corporate finance is determining the
optimal capital structure.
Ch4-14
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
B. The balance sheet provides information
for assessing:
3.
The related footnotes provide
information for evaluating liquidity, solvency,
and capital structure.
Ch4-15
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
3.
The related footnotes & Balance Sheet
provide information for evaluating liquidity, solvency,
and capital structure.

a. Liquidity measures how readily
assets can be converted to cash
relative to how soon
liabilities will have
to be paid in cash.
Ch4-16
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
3.
The related footnotes & Balance Sheet
provide information for evaluating liquidity, solvency,
and capital structure.

b. Solvency refers to the ability of a company to
generate sufficient cash flows to maintain its
productive capacity and still
meet interest and principal
payments on long-term debt.
Ch4-17
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
3.
The related footnotes & Balance Sheet
provide information for evaluating liquidity, solvency,
and capital structure.

c.
Financial flexibility refers to a company’s ability to
adjust to unexpected downturns in the economic
environment in which it operates or to
take advantage ofinvestment
opportunities as they arise.
Ch4-18
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
C. A classified balance sheet groups similar items
so that important relationships are revealed.
1.
Assets:
a.
Current assets.
b.
Long-term investments.
c.
Property, plant, and equipment.
d.
Intangible assets.
e.
Other (long-term) assets.
Ch4-19
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
C.
A classified balance sheet groups similar
items so that important relationships are
revealed.
2. Liabilities:
a.
Current liabilities.
b.
Long-term liabilities.
Ch4-20
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Assets = Liabilities + Owners’ Equity
C.
A classified balance sheet groups similar
items so that important relationships are
revealed.
3. Owners’ equity:
a.
Capital stock.
b.
Additional paid-in capital.
c.
Retained earnings.
Ch4-21
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & Cash Equivalents
$3,345
$ 1,453
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other current assets
Total Current Assets
699
171
5,125
5,057
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
If cash consists
exclusively of U.S.
dollar amounts, the
balance sheet
account reflects
the historical
amount, which is
identical to the
current market
value of cash.
Ch4-22
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
$3,345
$ 1,453
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other current assets
Total Current Assets
699
171
5,125
5,057
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
Cash amounts
denominated in
foreign currency
units is translated
into U.S. dollar
equivalents at the
balance sheet date
using the current rate
of exchange. This
portion of cash is
carried at its current
market price.
Ch4-23
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other current assets
Total Current Assets
$3,345
$ 1,453
699
171
5,125
5,057
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
The intended holding
period of the
company that owns
the securities
determines how the
debt and equity
securities are
measured on the
balance sheet.
Ch4-24
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other current assets
Total Current Assets
$3,345
$ 1,453
699
171
5,125
5,057
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
Some
investments will
be carried at
original
(historical) cost,
some at
amortized cost,
and others at
current cost.
Ch4-25
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other current assets
Total Current Assets
$3,345
699
$ 1,453
171
5,125
5,057
Gross accounts
receivable
equal the face
amounts arising
from past
transactions.
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
Ch4-26
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Other
assets
So, current
Net Accounts
Total Current are
Assets
Receivable
carried
at net realizable
value.
$3,345
699
$ 1,453
171
5,125
5,057
3,422
3,745
3,162
2,362
750
743
$16,503 $13,531
Gross accounts
receivable
are reduced by
an estimate of
the
accounts
receivable
that will
ultimately
not be
collected.
Ch4-27
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
Deferred Income Taxes
Whencurrent
costsassets
are lower
Other
Totalmarket
Current Assets
than
price, the
carrying amount for
inventory is
historical cost
$3,345 $ 1,453
699
171
5,125
5,057
3,422
The
measurement
of inventory
depends on the
relationship
between
historical costs
and current
market prices.
3,745
3,162
2,362
750
743
$16,503 $13,531
Ch4-28
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Current Assets
Cash & cash Equivalents
Short-Term Investments
Accounts Receivable, net
Inventories
$3,345 $ 1,453
699
171
5,125
5,057
3,422
The
measurement
of inventory
depends on the
relationship
between
historical costs
and current
market prices.
3,745
Deferred Income Taxes
3,162
2,362
When
cost
exceeds
Other
current
assets
750
743
Total Current
$16,503 $13,531
market,
Inv.Assets
are carried at
current market price,
market price is defined as
net realizable value.
Ch4-29
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
ASSETS
Total Current Assets
$16,503 $13,531
Property, Plant & Equipment,net 9,246 10,049
Other Assets
11,578
5,148
Total Assets
$ 37,327 $ 28,728
Property,Plant &
Equipment are on
the balance
sheet at:
Historical Cost
- Accum.Deprec.
Book Value(Net)
When a long-lived asset becomes impaired
—that is, when its carrying amount may no longer be
recoverable
—the fixed asset is reduced to its lower fair value.
Ch4-30
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Current Liabilities
Notes payable &
current portion of
long-term debt
$2,504
$ 2,909
Accounts payable
Accrued liabilities
3,015
6,897
2,305
6,226
Total Current Liabilities
Long-term debt
Deferred Income Taxes
Other liabilities
Total Liabilities
12,416
11,440
3,089
2,633
3,481
1,188
1,513
1,245
$16,503 $13,531
Accounts
payable
&
accrued
liabilities
are on the
balance sheet at
the amount of the
original liability
(historical cost).
Ch4-31
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Current Liabilities
Notes payable &
current portion of
long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-term debt
Deferred Income Taxes
Other liabilities
Total Liabilities
$2,504
3,015
6,897
12,416
$ 2,909
2,305
6,226
11,440
3,089
2,633
3,481
1,188
1,513
1,245
$16,503 $13,531
The initial
balance sheet
carrying amount
is the discounted
present value of
the sum of
(1) the future
principal
repayment plus
(2) the periodic
interest
payments.
Ch4-32
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Current Liabilities
Notes payable &
current portion of
long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-term debt
Deferred Income Taxes
Other liabilities
Total Liabilities
$2,504
3,015
6,897
12,416
$ 2,909
2,305
6,226
11,440
3,089
2,633
Fixed Rate Debt,
this
carrying amount
will differ from
current market
prices
when interest
rates have
changed
subsequent to
issuance.
3,481
1,188
1,513
1,245
$16,503 $13,531
Ch4-33
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Current Liabilities
Notes payable &
current portion of
long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-term debt
Deferred Income Taxes
Other liabilities
Total Liabilities
$2,504
3,015
6,897
12,416
$ 2,909
2,305
6,226
11,440
3,089
2,633
Variable Rate
Debt, this
carrying amount
will equal the
present value of
the future
principal
and
interest flows.
3,481
1,188
1,513
1,245
$16,503 $13,531
Ch4-34
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Current Liabilities
Notes payable &
current portion of
long-term debt
Accounts payable
Accrued liabilities
Total Current Liabilities
Long-term debt
Deferred Income Taxes
Other liabilities
Total Liabilities
$2,504 $ 2,909
3,015
2,305
6,897
6,226
12,416 11,440
3,089
2,633
3,481
Deferred income
taxes
are reported at their
undiscounted
amount.
(Original Amount)
1,188
1,513
1,245
$16,503 $13,531
Ch4-35
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Motorola Balance Sheet
Dec 31
2001
2000
LIBILITIES
Total Liabilities
Company-obligated
Mandatorily redeemable
Preferred securities of
subsidiary Trust holding
solely company
Guaranteed debentures
$16,503 $13,531
484
Mandatorily
redeemable
preferred stock
incorporates
elements of both
debt and equity.
These securities are
typically afforded
“mezzanine”
treatment.
--
Ch4-36
Motorola Balance Sheet
Dec 31
2001
2000
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
---2001&2000,
Common Stock
is reported at
historical
par
value.
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
Ch4-37
Motorola Balance Sheet
Dec 31
2001
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
2000
Additional paid-in
capital is reported
at historical cost
as the
---excess of original
issue price
2001&2000,
and
par value.
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
Ch4-38
Motorola Balance Sheet
Dec 31
2001
2000
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
---2001&2000,
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
This measures
the net of the
cumulative
earnings
less
cumulative
dividend
distributions of
the company
since
inception.
This is
reinvestment to
grow!
Ch4-39
Motorola Balance Sheet
Dec 31
2001
2000
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
---2001&2000,
Since
different
measurement
bases
pervade the
balance sheet, &
income statement
so
retained
earnings
is a mixture of
historical costs,
current values, and
present values.
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
Ch4-40
Motorola Balance Sheet
Dec 31
2001
2000
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
---2001&2000,
This measures the
net of the
cumulative
unrealizable gains
and losses
from
other
comprehensive
income components
recognized in
current and prior
years
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
Ch4-41
Motorola Balance Sheet
Dec 31
2001
2000
STOCKHOLDERS’ EQUITY
Preferred stock, $100 PV
Authorized shares:
.5 (non issued)
Common Stock, $3 PV
Authorizes shares:
1,400
Issued & outstanding:
----
---2001&2000,
1,838
1,804
Additional paid-in capital 2,572
1,894
Retained earnings
8,780
8,254
Non-owner changes to equity 3,154
270
Total Stockholders’ Eq. $16,344 $12,222
2001,612.8;2000;601.1
This account is
debited for
unrealized losses
and
credited for
unrealized gains.
All amounts are
shown
net of tax
effects.
Ch4-42
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Q.

Extracting Analytical Insights
1. One tool for gaining insights into the
company’s operations and for
analyzing its assets and
financial structures is to
prepare a common-size
balance sheet.
Ch4-43
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Q.



Extracting Analytical Insights
2. The account titles and formats for balance
sheets prepared in other countries can sometimes
differ from those prepared in the U.S.
In the U.S. assets are presented in
decreasing order of liquidity.
In the U.K., Germany, Netherlands, and
other European countries, fixed assets
are presented first followed by current
assets displayed in an increasing order
of liquidity.
Ch4-44
I. Classification Criteria and
Measurement Conventions for
Balance Sheet Accounts
Q.

Extracting Analytical Insights
3. Analysts must pay attention to the differences in
accounts and valuation techniques that are allowed by
different countries’
GAAP procedures.
Ch4-45
II. Statement of Cash Flows:


A. The statement of cash flows
shows the user why a firm’s
investments and financial structure
have changed between two periods.
1. The critical issue then becomes
the timing of income recognition.
Ch4-46
II. Statement of Cash Flows:

2. The connection between
successive balance sheet positions and the
statement of cash flows can be shown:
a.
b.
Assets = Liabilities + Owners’ equity
Cash + Noncash assets = Liabilities + Owners’ equity
c.
Cash = Liabilities - Noncash assets + Owners’ equity
d.
DCash = DLiab - DNoncash assets + DOwners’ equity
Ch4-47
II. Statement of Cash Flows:
2. The connection between successive
balance sheet positions and the statement
of cash flows can be shown:
D Cash = D Liab  D Noncash assets + D Owners’ equity
e. The cash flow statement simultaneously provides
an explanation of why a firm’s cash position has
changed between successive balance sheet dates and
explains changes that have taken place in the firm’s
noncash asset, liability, and stockholders’ equity
accounts over the same time period.

Ch4-48
II. Statement of Cash Flows:

3. The change in a firm’s cash position
between successive balance sheet dates
will not equal the reported earnings for
that period.
Ch4-49
II. Statement of Cash Flows:

3. The change in a firm’s cash position
between successive balance sheet dates will
not equal the reported earnings for that
period.
a.
Reported net income will not equal
cash flow from operating activities
because of differences between
accrual-based and
cash-based accounting.
Ch4-50
II. Statement of Cash Flows:

3. The change in a firm’s cash position
between successive balance sheet dates will
not equal the reported earnings for that
period.
b. Changes in cash may be caused by
nonoperating investing
activities like the purchase
or sale of property, plant,
and equipment.
Ch4-51
II. Statement of Cash Flows:

3.
The change in a firm’s cash position
between successive balance sheet dates will not
equal the reported earnings for that period.
c. Changes in cash may be caused by
nonoperating financing
activities like the issuance
of stock or bonds or the
repayment of a bank
loan.
Ch4-52
II. Statement of Cash Flows:
B. The cash flow statement summarizes the
cash inflows and outflows of a company broken
down into three activities:
1.
Cash flows from operating activities result from the cash
effects of transactions and events that affect operating income.

2.
Cash flows from investing activities result from the cash
effects of transactions and events that affect long-term assets.

3.
Cash flows from financing activities result from the cash
effects of transactions and events that affect long-term
liabilities and owners’ equity (other than net income).

Ch4-53
II. Statement of Cash Flows:
Let’s Look
at an Example of
Cash & Accrual
Accounting
Ch4-54
HRB Advertising Company
HRB Advertising opened on April 1, 2001.
The corp.’s for the remainder of 2001 are as follows:
1. Each of the 3 partners contributed $3500 cash on April 1
for shares of the company’s stock.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Total Operating Cash Flow
Investing Activities
Financing Activities
Net Income
Stock Issuance
Change in Cash
$10,500
Ch4-55
HRB Advertising Company
HRB Advertising opened on April 1, 2001.
The corp.’s for the remainder of 2001 are as follows:
2. HRB rented office space Beg. April 1, and paid the full year’s
rental of $2000 per month or $24,000 in advance.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Rent Expense ($24,000)
Total Operating Cash Flow
Investing Activities
Financing Activities
Net Income
Stock Issuance
Change in Cash
$10,500
Ch4-56
HRB Advertising Company
3. The Company borrowed $10,000 from a bank on April 1.
The loan and accrued interest is payable Jan. 1, 2002 w/ interest
at 12% per year.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Rent Expense ($24,000)
Total Operating Cash Flow
Investing Activities
Financing Activities
Net Income
Bank borrowing
Stock Issuance
Change
in Cash
$10,000
$10,500
Ch4-57
HRB Advertising Company
4. HRB purchased office eq. With a 5 year life for $15,000 cash
on April 1. Equipment is depreciated straight-line no
salvage value.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Rent Expense ($24,000)
Total Operating Cash Flow
Investing Activities
Equipment purchase ($15,000)
Financing Activities
Net Income
Bank borrowing
Stock Issuance
Change
in Cash
$10,000
$10,500
Ch4-58
HRB Advertising Company
5. HRB sold and billed customer for $65,000 of advertising
services rendered between April 1 and Dec 31.
Of this amount, $20,000 was still uncollected by year-end.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent
Expense Cash
($24,000)
Total Operating
Flow
Adverting Rev.(Accrual Actg.) = Revenue Earned
Investing Activities
Services Performed
= $65,000
Equipment purchase ($15,000)
Advertising Revenue $65,000
Financing Activities
Net Income
Bank borrowing
Stock Issuance
Change
in Cash
$10,000
$10,500
Ch4-59
HRB Advertising Company
6. By year-end, the company used and paid the following
operating costs: (a) utilities $650, (b) salaries, $36,250 and (c)
supplies $800.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Advertising Revenue $65,000
Utilities Expense
(650)
Advertising Revenue $45,000
Rent Expense
($24,000)
Utilities Expense
(650)
Salary Expense
Salary Expense
Supplies Expense
($36,250)
(800)
Supplies Expense
($36,250)
(800)
Total Operating Cash Flow
Investing Activities
Equipment purchase ($15,000)
Financing Activities
Net Income
Bank borrowing
$10,000
Stock Issuance $10,500
Change in Cash
Ch4-60
HRB Advertising Company
7. The company had accrued (unpaid) expenses at year-end as
follows: (a) utilities $75; (b) salaries $2,400; and (c) interest
$900.
Accrual Basis Income Statement
Operating Activities
Advertising Revenue $65,000
Utilities Expense
(650)
(725)
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent Expense ($24,000)
Utilities Expense
(650)
Utilities
Expense(Used)
= $650
+ $75
=$725 ($36,250)
Salary Expense
($36,250)
Salary
Expense
Supplies Expense(Used)
Salary
Expense (38,650)
(800)
= $36,250
+ $2,400
=$ 38,650
Supplies
Expense
(800)
Total Operating
Cash Flow
Interest
Interest
Expense
Expense(Used)
(900)
Investing Activities
= $10,000*.12*9/12=
$900
EquipmentActivities
purchase ($15,000)
Financing
Net Income
Stock Issuance
Bank borrowing
Change in Cash
$10,500
$10,000
Ch4-61
HRB Advertising Company
8. Supplies purchased on account and unpaid at year-end is
$50. Supplies on hand at year-end is $100.
Accrual Basis Income Statement
Operating Activities
Advertising Revenue $65,000
Utilities Expense
(725)
Salary Expense
Supplies Expense
(38,650)
(750)
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent Expense
($24,000)
Utilities Expense
Salary Expense
(650)
($36,250)
Supplies
Expense
Total
Operating
Cash Flow(800)
Investing Activities
Supplies Expense(Used) = $$ Purchased – End. Supplies
Financing
Activities
$750
= ($800
+ $50)
- $100
Equipment
purchase
($15,000)
Interest Expense
Net Income
(900)
Bank borrowing
$10,000
Stock Issuance
Change
in Cash $10,500
Ch4-62
HRB Advertising Company
9. Annual Depr. Exp. On office Eq. Is $3000. Since the Eq. Was
acquired on April 1, the Dep Exp for 2001 is $3,000 * 9/12 =
$2,250.
Accrual Basis Income Statement
Operating Activities
Cash Flow Statement
Operating Activities
Advertising Revenue $65,000
Utilities Expense
(725)
Rent Expense ($24,000)
Salary Expense)
Supplies
(38,650)
(750)
Advertising Revenue $45,000
Utilities Expense
Salary Expense
(650)
($36,250)
Supplies
ExpenseCash Flow
(800)
Total Operating
Investing Activities
Interest Expense
(900)
Depreciation
Exp.
Net Income
(2,250)
EquipmentActivities
purchase ($15,000)
Financing
Bank borrowing
$10,000
Stock Issuance
Change
in Cash $10,500
Ch4-63
HRB Advertising Company
10. The office space was used for 9 months $18,000.
Accrual Basis Income Statement
Operating Activities
Advertising Revenue $65,000
Utilities Expense
(725)
Salary Expense
($36,250)
(38,650)
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent Expense
($24,000)
Utilities Expense
(650)
Salary Expense
($36,250)
Rent Used(Accrual Actg.) = Cost per Month * Months Used
Supplies Expense
(800)
(750) = Supplies
Expense
(800)
$18,000
Total
$2,000
Operating
*Cash Flow
9
Rent Expense
Interest Expense
Depreciation Exp.
Net Income
($18,000)
(900)
(2,250)
Investing Activities
Equipment
purchase ($15,000)
Financing Activities
Bank borrowing
Stock Issuance
Change
in Cash
$10,000
$10,500
Ch4-64
HRB Advertising Company
LET’S GET THE FINAL RESULTS !!!!
Accrual Basis Income Statement
Operating Activities
Advertising Revenue $65,000
Rent Expense
($18,000)
Utilities Expense
Salary Expense
Supplies Expense
Interest Expense
(725)
(38,650)
(750)
(900)
Depreciation Exp.
(2,250)
Net Income
$ 3725
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent Expense
($24,000)
Utilities Expense
Salary Expense
Supplies Expense
(650)
($36,250)
(800)
Total Operating Cash Flow
Investing Activities
($16,700)
Equipment
purchase ($15,000)
Financing Activities
Bank borrowing
Stock Issuance
Change in Cash
$10,000
$10,500
$20,500
($11,200)
HRB Advertising Company
Cash Flow Statement
Operating Activities
Advertising Revenue $45,000
Rent Expense ($24,000)
Utilities Expense
(650)
Salary Expense
($36,250)
Supplies Expense
(800)
Total Operating Cash Flow
Direct approach shows
the individual
operating cash inflows
and outflows
directly.
($16,700)
Ch4-66
HRB Advertising Company
Cash Flow Statement
Operating Activities
Net Income
$ 3,725
Plus:
Depreciation
$2,250
Increase in S/P
2,400
Increase in A/P
50
Increase in Util/P
75
Increase in Int/P
900
5,675
Minus:
Increase in A/R
(20,000)
Increase in Prpd Rent
(6,000)
Increase in Supplies
(100) (26,100)
Cash Flow from operations
($16,700)
Indirect
approach arrives
at net cash
flows from
operations by
adjusting net
income for the
differences
between accrualbasis earnings
and cash-basis
earnings.
Ch4-67
HRB Advertising Company
Cash Flow Statement
Operating Activities
Net Income
$ 3,725
Plus:
1) Add noncash expenses (i.e., depreciation;
amortization; bond discount; losses on sales
of property, plant, and equipment.) to net
income.
Cash Flow from operations
Indirect
approach arrives
at net cash
flows from
operations by
adjusting net
income for the
differences
between accrualbasis earnings
and cash-basis
earnings.
($16,700)
Ch4-68
HRB Advertising Company
Cash Flow Statement
Operating Activities
Net Income
$ 3,725
Plus:
2) Add net decreases in current assets.
3) Add net increases in current liabilities.
Indirect
approach arrives
at net cash
flows from
operations by
adjusting net
income for the
differences
Cash Flow from operations
($16,700)
between accrualbasis earnings
and cash-basis
earnings.
Ch4-69
HRB Advertising Company
Cash Flow Statement
Operating Activities
Net Income
Plus:
Minus:
$ 3,725
4) Subtract net decreases in current
liabilities.
5) Subtract net increases in current assets.
6) Subtract noncash gains (amortization;
bond premium; gains on sales of
property, plant, and equipment.) to net
income.
Cash Flow from operations
($16,700)
Indirect
approach arrives
at net cash
flows from
operations by
adjusting net
income for the
differences
between accrualbasis earnings
and cash-basis
earnings.
Ch4-70
II. Statement of Cash Flows:
Let’s Look at an Example
of Making
a
Statement
of
Cash Flows
Ch4-71
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002
Change
Assets
Cash
($11,200) $ 500 + $ 11,700
A/R
20,000 15,775 4225
Supplies Inventory
100
225 +
125
Prepaid Rent
6,000
6,000
--Office Equipment
15,000 16,500 + 1,500
Less: A/D
(2,250
(5,500) 3,250
Total Assets
$ 27,650 $ 33,500 + $ 5,850
#1
Calculate
Change in
Balance
Sheet
Accounts
Ch4-72
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001
2002 Change
Assets
Cash
($11,200) $ 500 + $ 11,700
A/R
20,000 15,775 4225
Supplies Inventory
100
225 +
125
Prepaid Rent
6,000
6,000
--Office Equipment
15,000 16,500 + 1,500
Less: A/D
(2,250
(5,500) 3,250
Total Assets
$ 27,650 $ 33,500 + $ 5,850
Answer to:
Increase
in
Cash
for the
period
on
Statement
Ch4-73
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001
2002
Change
Assets
Cash
($11,200) $ 500 + $ 11,700
A/R
20,000 15,775
- 4225
OP Supplies Inventory 100
225
+ 125
OP Prepaid Rent
6,000
6,000
--OP
Office Equipment 15,000 16,500
+ 1,500
INV Less: A/D
(2,250) (5,500)
- 3,250
Total Assets
$ 27,650 $ 33,500 + $ 5,850
OP (Dep. Exp) and/or INV(Asset Sales)
#2
Classify
what part of
SCF the
Balance
Sheet Items
relate to.
Operating
Financing or
Investing
Ch4-74
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001
2002
Change
Assets
Cash
($11,200) $ 500 + $ 11,700
A/R
20,000 15,775 4225
Supplies Inventory
100
225 +
125
Prepaid Rent 6,000
6,000
--Office Equipment
15,000 16,500 + 1,500
Less: A/D
(2,250
(5,500) 3,250
Total Assets
$ 27,650 $ 33,500 + $ 5,850
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
Ch4-75
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
2001 2002 Change
Balance Sheet A/R 20,000 15,775 -4225
Income St.
Revenues
$92,000
A/R relates to what Income Statement item?
A/R
Beg. Bal $20,000
Credit
Sales
$92,000
????
End. Bal $15,775
Revenues
Cash
Collections
96,225
????
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
$92,000
Cash Effect!!
Ch4-76SCF!
Now, let’s see how it looks on the
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
2001 2002 Change
Balance Sheet A/R 20,000 15,775 - 4225
Cash Collections
Income St. Revenues
Net Income
SCF
Direct Method
Operating Activities
Cash Revenues
$96,225
$96,225
$92,000
($1,725)
SCF
Indirect Method
Operating Activities
Net Income
Plus:
Decrease in A/R
($1,725)
4225
Ch4-77
Putting together a
Revenues
Statement of Cash Flows
-Expenses
HRB Comparative Balance Sheets
Net Loss
Operating activity
$ 92,000
(93,725)
($1,725)
2001 2002 Change
Revenues
$92,000
Balance Sheet A/R 20,000 15,775 - +4225
dec. in A/R
4,225
Cash Collections
$96,225 Cash Revenues$96,225
It’s there but it’s hidden!
Income St. Revenues
$92,000
Net Income
($1,725)
SCF
Direct Method
Operating Activities
Cash Revenues
$96,225
SCF
Indirect Method
Operating Activities
Net Income
Plus:
Decrease in A/R
($1,725)
4225
Ch4-78
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Balance Sheet 2001 2002 Change
Operating activity
Supplies Inv.
100
225 + 125
A/P (Supplies)
50
75 + 25
Income St. Supplies Exp. $1,200
Supplies relates to what Income Statement item?
Supplies Inv.
Supplies Exp.
A/P (Supplies)
Beg. Bal
Purchases on
Account
End. Bal
$100
1,325
????
$225
Supplies $1,200
Used
Cash Effect!!
$1,200
????
Beg. Bal
1,300
????
Supplies
Paid
End. Bal
$50
1,325
????
Pur on
Acc
$75
Ch4-79
Putting together a
Statement of Cash Flows
Operating activity
HRB Comparative Balance Sheets
Balance Sheet 2001 2002 Change
Supplies Inv.
100
225 + 125
A/P (Supplies)
50
75 + 25
Cash Paid (Supplies)
1,300
Income St. Supplies Exp.$1,200
SCF
Direct Method
Operating Activities
Supplies
($1,300)
SCF
Indirect Method
Operating Activities
Net Income
Plus:
($1,725)
Increase in A/P Sup.
Minus:
25
Increase in Supplies Ch4-80
(125)
Operating activity
Putting together a
Revenues $ 92,000
Statement of Cash Flows
-Expenses
(93,725)
Loss
HRB Comparative BalanceNet
Sheets
Balance Sheet 2001 2002 Change
($1,725)
Supplies Exp. ($1,200)
Supplies Inv.
100
225 + 125
+ inc. in Sup.
(125)
A/P (Supplies)
50
75 + 25
- dec.in A/P
25
Cash Paid (Supplies)
1,300
Cash Supplies ($1,300)
It’s there but it’s hidden!
Income St. Supplies Exp.$1,200
SCF
Direct Method
Operating Activities
Supplies
($1,300)
SCF
Indirect Method
Operating Activities
Net Income
Plus:
($1,725)
Increase in A/P Sup.
Minus:
25
Increase in Supplies Ch4-81
(125)
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
Balance Sheet
2001 2002 Change
Prepaid Rent
6,000 6,000 + 0
Income St. Rent Exp. $24,000
Rent relates to what Income Statement item?
Prepaid Rent
Rent Exp.
Beg. Bal
Rent Used
$6,000 1/1-3/31
24,000
????
Rent Paid in
Advance this yr.
End. Bal
$6,000
$24,000
????Effect!!
6,000
Cash
????
18,000
Rent Used
4/1-12/31
Ch4-82
Putting together a
Statement of Cash
Revenues
-Expenses
Net Loss
Flows
$ 92,000
(93,725)
($1,725)
HRB Comparative BalanceRent
Sheets
Exp.
($24,000)
Balance Sheet 2001 2002 Change
+/- Prepaid
0
Prepaid Rent
6,000 6,000 + 0 Rent.
Cash Rent
($24,000)
Cash Paid Rent
$24,000
Cash & Accrual are
Income St. Rent Exp. $24,000
equal , no adj. needed
SCF
Direct Method
Operating Activities
Rent
($24,000)
SCF
Indirect Method
Operating Activities
Net Income
Plus:
Prepaid Rent +/-
Minus:
($1,725)
0
Ch4-83
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
Balance Sheet
- No Sales of Equipment
2001 2002
Change
Acc. Depr.
(2,250) (5,500) ($3,250)
Income St. Depr. Exp. $3,250
Depreciation relates to what Income Statement item?
Depr. Exp.
Acc Depr.
0
????
Assets Sold
$2,250 Beg. Bal
????
3,250
$ 3,250
NO Cash Effect!!
Deprecation Exp.
$5,500 End. Bal
Ch4-84
Putting together a
Statement of Cash Flows
HRB Comparative
Balance Sheet
Revenues $ 92,000
-Expenses
(93,725)
BalanceNet
Sheets
Loss
($1,725)
2001 2002
Depr. Exp.
($3,250)
+non cash exp $3,250
Change
Cash Depr.
0
Acc. Depr.
(2,250) (5,500) ($3,250)
Income St. Depr. Exp. $3,250 (Non-Cash Item)
SCF
Direct Method
SCF
Indirect Method
Operating Activities
Depreciation
Operating Activities
0
Net Income
Plus:
Depr. Expense
Minus:
($1,725)
3,250
Ch4-85
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Investing activity
2001 2002 Change
Balance Sheet Off.Eq. 15,000 16,500 +1,500
Purchased Office Equipment for Cash.
No Sales of Equipment
Office Equip.
-
Cash
Beg. Bal $15,000
$1,500
????
Purchases
End. Bal $16,500
Eqip. SoldCash Effect!!
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
$1,500
????
0
Ch4-86
Now, let’s see how it looks on the
SCF!
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Investing activity
Balance Sheet Off.Eq. 15,000 16,500 +1,500
Cash Paid for Office Eq.
($1,500)
Purchased Office Equipment for Cash.
No Sales of Equipment
SCF
Direct Method
Investing Activities
Equipment Purchase($1,500)
-
SCF
Indirect Method
Investing Activities
Equipment Purchase($1,500)
Ch4-87
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Liabilities
Utilities Payable
$75
$ 50
- 25
OP Interest Payable
900
675
- 225
50
75
+ 25
OP A/P (Supplies)
Salaries Payable
2,400
4,200
+ 1,800
OP
Bank Loan Payable 10,000
0
- 10,000
OP Note Payable
0 10,000
+10,000
FINTotal Liabilities$ 13,425 $15,000 + $ 1,575
#2
Classify
what part of
SCF the
Balance
Sheet Items
relate to.
Operating
Financing or
Investing
FIN
Ch4-88
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
2001 2002 Change
Balance Sheet Util/Pay 75
50
-25
Income St.
Utilities Exp.
$1,050
Utilities relates to what Income Statement item?
Utility Pay.
Utility Exp.
$75 Beg. Bal
Utilities
$1,075
????
Paid
Utilities Used
Cash Effect!!
1,050
????
$50
$1,050
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
Now, let’s see how it looks on the SCF!
End. Bal
Ch4-89
Putting together a
Revenues
Statement of Cash Flows
-Expenses
Sheets
Net Loss
$ 92,000
(93,725)
($1,725)
HRB Comparative Balance
Operating activity
2001 2002 Change
Utilities Exp. ($1,050)
Balance Sheet Util/Pay 75
50 +decr.in
-25 Util/Pay (25)
Utilities Paid
Income St.
Utilities Exp.
SCF
Direct Method
Operating Activities
Utilities
($1,075)
1,075 Cash Utilities ($1,075)
It’s there but it’s hidden!
$1,050
SCF
Indirect Method
Operating Activities
Net Income
($1,725)
Minus:
Decrease in Util/Pay (25)
Ch4-90
Putting together a
Statement of Cash Flows
#3
Analyze
HRB Comparative Balance Sheets
changes and
determine
Operating activity
2001 2002 Change
Cash Flow
Balance Sheet Int/Pay 900 675
-225
effect along
Income St.
with info
Interest Exp. $1,350
from
Income
Interest relates to what Income Statement item?
Statement
Interest Pay.
Interest Exp. and other
data as
needed
$900 Beg. Bal
Interest
$1,575
????
Paid
Interest Used
Cash Effect!!
1,350
????
$675
$1,350
Now, let’s see how it looks on the SCF!
End. Bal
Ch4-91
Putting together a
Revenues
Statement of Cash Flows
-Expenses
Sheets
Net Loss
$ 92,000
(93,725)
($1,725)
HRB Comparative Balance
2001 2002 Change
Int. Exp.
($1,350)
Balance Sheet Int/Pay 900 675 +decr.in
-225 Int/Pay (225)
Cash Interest Paid
1,575 Cash Interest ($1,575)
It’s there but it’s hidden!
Income St.
Interest Exp. $1,350
SCF
Direct Method
Operating Activities
Interest
($1,575)
SCF
Indirect Method
Operating Activities
Net Income
Minus:
($1,725)
Decrease in Intl/Pay (225)
Ch4-92
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Operating activity
2001 2002 Change
Balance Sheet Sal/Pay 2,400 4,200 +1,800
Income St.
Salary Exp.
$62,875
Salary relates to what Income Statement item?
Salary Exp.
Salary Pay.
Salary
Paid
????
$61,075
$2,400 Beg. Bal $ 62,875
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
Salary Used
Cash Effect!!
62,875
????
Now, let’s see how it looks on the SCF!
$4,200
End. Bal
Ch4-93
Putting together a
Revenues
Statement of Cash Flows
-Expenses
Sheets
Net Loss
$ 92,000
(93,725)
($1,725)
HRB Comparative Balance
Operating activity
2001 2002 Change
Sal. Exp.
($ 62,875 )
Balance Sheet Sal/Pay 2,400 4,200 +incr.
+1,800
Sal/Pay 1,800
Cash Salary Paid
Income St. Salary Exp.
SCF
Direct Method
Operating Activities
Salary
($ 61,075)
$61,075 Cash Salary ($61,075)
It’s there but it’s hidden!
$62,875
SCF
Indirect Method
Operating Activities
Net Income
Plus:
($1,725)
Increase in Sal/Pay 1,800
Ch4-94
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Financing activity
2001 2002 Change
Balance Sheet Bank Loan 10,000 0 -10,000
Company paid off bank loan.
Bk Loan/Pay
Beg. Bal
$10,000
$10,000
????
Payments
End. Bal
Cash
New Loans
Cash Effect!!
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
$10,000
????
0
$0
Ch4-95
Now, let’s see how it looks on the
SCF!
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Financing activity
Balance Sheet Bank Loan 10,000 0 -10,000
Bank Loan Paid
10,000
Company paid off bank loan.
SCF
Direct Method
Financing Activities
Bank Loan
Repayment
($10,000)
SCF
Indirect Method
Financiang Activities
Bank Loan
Repayment
($10,000)
Ch4-96
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Financing activity
2001 2002 Change
Balance Sheet N/P
0 10,000 +10,000
Company issued a Note Payable for cash.
Note Payable
Beg. Bal
$0
????
0
Payments
End. Bal
New Loans
Cash
$10,000
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
Cash Effect!!
$10,000
????
$10,000
Ch4-97
Now, let’s see how it looks on the
SCF!
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
Financing activity
2001 2002 Change
Balance Sheet N/P
0 10,000 +10,000
Company issued a Note Payable for cash $10,000.
SCF
Direct Method
Financing Activities
Note Payable
Issued
$10,000
SCF
Indirect Method
Financiang Activities
Note Payable
Issued
$10,000
Ch4-98
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002
Change
Stockholders’ Equity
Common Stock
$10,500 $16,500 + 6,000
FIN
Retained Earnings
3,725 2,000
- 1,725
FIN & OP
Total
Stockholders’
Equity
$ 13,425 $15,000 + $ 1,575
#2
Classify
what part
of SCF the
Balance
Sheet
Items relate
to.
Operating
Financing
or
Investing
Ch4-99
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Stockholders’ Equity
Common Stock
$10,500 $16,500 + 6,000
FIN Retained Earnings
3,725 2,000
- 1,725
OP
Net Income ($ 1,725)
0
FIN Dividends
R/E
($ 1,725)
#2
Classify
what part
of SCF the
Balance
Sheet
Items relate
to.
Operating
Financing
or
Investing
Ch4-100
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Financing activity
Balance Sheet
Common Stock
10,500 16,500 +6,000
Company issued a Common Stock for cash $6,000.
Common Stk
Beg. Bal
$ 10,500
????
0
Stock Retired
End. Bal
Cash
$6,000
#3
Analyze
changes and
determine
Cash Flow
effect along
with info
from
Income
Statement
and other
data as
needed
Cash Effect!!
Stock Issued
$6,000
????
$ 16,500
Now, let’s see how it looks on the SCF!
Ch4-101
Putting together a
Statement of Cash Flows
HRB Comparative Balance Sheets
2001 2002 Change
Financing activity
Balance Sheet
Common Stock
10,500 16,500 +6,000
Company issued a Common Stock for cash $6,000.
SCF
Direct Method
Financing Activities
Common Stock
Issued
$6,000
SCF
Indirect Method
Financiang Activities
Common Stock
Issued
$6,000
Ch4-102
HRB Advertising
Statement of Cash Flows
2001 2002
Operating Activities
Advertising Services
$45,000 $96,225
Salaries
(36,250) (61,075)
Rent
(24,000) (24,000)
Utilities
(650) (1,075)
Supplies
(800) (1,300)
Interest
–(1,575)
Total Op. Cash Flow ($16,700) $7,200
Investing Activities
Equipment Purchase
($15,000) ($ 1,500)
Total Inv. Cash Flow($15,000) ($1,500)
Financing Activities
Bank borrowing
$10,000 ($10,000)
Note issuance
–
10,000
Stock issuance
10,500
6,000
Total Fin. Cash Flow $20,500 $6000
Change in Cash
($11,200) $11,700
The statement
of cash flows
is useful
because it:
1. Shows the
entity’s ability
to
generate
future cash
flows.
HRB Advertising
Statement of Cash Flows
2001 2002
Operating Activities
Advertising Services
$45,000 $96,225
Salaries
(36,250) (61,075)
Rent
(24,000) (24,000)
Utilities
(650) (1,075)
Supplies
(800) (1,300)
Interest
–(1,575)
Total Op. Cash Flow ($16,700) $7,200
Investing Activities
Equipment Purchase
($15,000) ($ 1,500)
Total Inv. Cash Flow($15,000) ($1,500)
Financing Activities
Bank borrowing
$10,000 ($10,000)
Note issuance
–
10,000
Stock issuance
10,500
6,000
Total Fin. Cash Flow $20,500 $6000
Change in Cash
($11,200) $11,700
The statement
of cash flows
is useful
because it:
2. Shows the
entity’s ability
to pay
dividends
and meet
obligations.
HRB Advertising
Statement of Cash Flows
2001 2002
Operating Activities
Net Income
$3,725 ($1,725)
Depreciation
2,250
3,250
Adjustments:
A/R dec (inc)
(20,000) 4,225
Supplies dec (inc)
(100) ( 125)
Prepaid Rent dec (inc) (6,000)
-Utilities Pay inc (dec)
75
(25)
A/P Supplies inc (dec)
50
25
Int/Pay inc (dec)
900
(225)
Sal/Pay inc (dec)
2,400 1,800
Total Op. Cash Flow ($16,700) $7,200
The statement
of cash flows
is useful
because it:
3. Details
differences
between net
income and
cash
provided by
operations.
HRB Advertising
Statement of Cash Flows
2001 2002
Operating Activities
Total Op. Cash Flow ($16,700) $7,200
Investing Activities
Total Inv. Cash Flow ($15,000) ($1,500)
Financing Activities
Total Fin. Cash Flow $20,500 $6000
Change in Cash
($11,200) $11,700
Significant
Non-Cash Investing & Financing Activities
Exchanged Land
for Stock
Purchased Building
with Note Payable
$15,000
--
--
$25,000
The statement
of cash flows
is useful
because it:
4.
Details cash
and noncash
investing
and
financing
activities.