Appendix - Transcription of Financial Accounting lectures

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Ka Shing Ko <10631727@learner.hkuspace.hku.hk> Tue, Sep 13, 2022 at 10:16 PM

To: A1029488@live.hkmu.edu.hk

hello in this lecture we want to talk

about creating a statement of cash flows

using the indirect method we will be

able to define a statement of cash flows

create a statement of cash flows explain

a process of creating a statement of

cash flows designed to limit mistakes

and define the indirect method so what

we'll do is we'll work through basically

a problem and look through the statement

of cash flows we want to think about a

few things we want to think about how to

create a statement of cash flows we want

to think about a few definitions of what

is a statement of cash flows we want to

kind of explain what the purpose is of a

statement of cash flows and going

through the process can help us to do

that I also want to point out that

creating the statement of cash flows can

help us with setting up a problem in

such a way that we can limit the amount

of mistakes that we will make so a

statement of cash flows is something

that in a lot of firms people generally

I often have problems to create the

statement of cash flows and it's good

practice to go in there and and create

the statement of cash flows and try to

create a system in which it's easy for

us to have checkpoints and see where a

problem is going to happen so that's

also something that we will work through

with a statement of cash flows because

at the end of the process just like if

we're creating a balance sheet it's easy

for us to get to the end and it doesn't

it's not in balance it's not working and

not have any checkpoints to go back and

try to figure out what where is it off

why is it off and then you start the

entire thing over so creating the

process in which you can have

checkpoints and go back and try to

figure out where it went off is good not

just for accounting but for any any type

of process if you're trying to figure

something out you want to see ok where

can we hide them to find points in which

we know that we're correct here we know

we're correct there then we can move

forward in a systematic way also want to

point out that a statement of cash flows

was really good for learning accrual

concepts so you can get a lot of the

statement of cash flow questions right

if you just memorize the types of areas

within the statement of cash flows but

if you're actually going to work a long

problem like this or work a statement of

cash flows and create one from scratch

if you can do that explain that you

really are getting the

concepts of an accrual concept than cash

concepts because what we're doing is

we're converting from an accrual concept

to an a cash concept and when we do it

in an indirect method we're doing that

indirectly which is kind of conceptually

difficult so if you're able to do the

steps then that's really good if you're

able to do the steps and explain those

steps then you have a really good

understanding and that's good practice

to understand the accrual concept what

the accrual concepts are and how they

compare to a cash concept so the way a

statement of cash flows will be created

generally is that we'll take a look at

the financial statements and then we'll

put a worksheet together the worksheet

being over here and then we'll take that

worksheet and we'll create the statement

of cash flows from it so that's going to

be our strategy that'll be our process

notice that first of all the statement

of cash flows is a beginning and end it

has a beginning of ninjas like the

income statement it's over time because

we're measuring cash flows over time the

funny thing about its statement of cash

flows is we will do that using basically

balance sheet accounts and that the

reason that's fun is because the balance

sheet accounts are going to be as if a

point in time so the balance sheet

accounts are as of a point in time we're

using that to create something that is

has a beginning and an end such as the

income statement so the reason we'll do

that is because we have a balance sheet

will be using the beginning point in

time which is the same as the end of the

prior period in this case the end of the

last year 20 x 4 and we will take the

current balance sheet amount so we have

a comparative balance sheet here as of

20 x 5 in this case and we will then

look at the difference the difference

will be the change so obviously if we're

looking at the end period here for cash

123 450 compared to the beginning of

cash 61 550 then the difference in that

in essence is the change so that's the

whole story that's like the big picture

story of what happened to catch well

that's the change in cash of course cash

went up and down and whatnot that's more

detail in the story but in essence we

have that change in cash that's going to

be our you know towards the end of the

cash flow statement that's the end of

our story we're going to kind of back

into what happened why do we have this

change in cash

first thing we're going to do to do that

is basically convert the already

converted balance sheet back in the kind

of like a trial balance and this is

really good practice to do because we

have practice going from a trial balance

to creating the financial statements so

going from a debit and credit trial

balance to creating the financial

statements it's good practice to go back

the other way because now we're going to

take basically there's a plus and minus

financial statements plug them back into

a debit credit format so that we can use

that worksheet to then create the

financial statements so this would be

the first step I'm going to remove the

subtotals we're going to take the plus

and minus format convert it back in

debits and credits so for example 4 2015

we're just taking this number here

that's where the cash is gone we're

going to take the accounts table it's

going to go back here we're going to

take the inventory it's going to go here

we're going to take the prepaid expenses

those are the assets going to go here we

eliminate the total we're not going to

total up here however that's a good

checkpoint we can add these up and if

those add up to this total we're doing

good so far and then we're going to keep

on moving on to the next account

equipment is going to go here

accumulated depreciation notice there's

no negative here but it says less so

that's a plus and minus statement we

need to convert that to a debit and

credit we will then I'm going to

represent the credits with brackets here

so i'm going to put bracketed 110 750

now a lot of people will not do that

because that's a common error to mess

things up before doing things quickly if

we check do our check figure here we

would say well it's this minus this

should equal this check number so we'll

be able to check that or we can say this

Plus this Plus this Plus this Plus this

minus this which we can highlight if it

was in Excel should equal our total

assets and if we do that we're doing

good so far then we would keep on moving

on accounts payable accounts payable

credit so it's a positive number here

we're revenue representative as a credit

on our worksheet and then we've got the

short term that's here credit we would

add the two credits up adds up to our

subtotal we will not include the

subtotal but that's a good check figure

then we've got the long term here's the

long-term credit we have the common

stock so common stock is going to be a

credit we have the retained earnings

it's going to be paid in capital our

credit and then we have the retained

earnings which will be a credit and once

again we can check and see if this is in

balance by saying the debits minus the

credits should then equal zero so the

debits are positive number credits are

negative number that's how will

represent this in a shortened worksheet

limiting the amount of columns we will

need in order to make the worksheet and

of course will do the same thing for the

two thousand X for pulling these numbers

in in the same fashion and if we do that

then the debit and credit for two

thousand x4 will add up to zero if the

debits and credits for two thousand x5

add up to zero and the debits in the

credits for two thousand x4 add up to

zero will then take the change for all

those amounts so 2000 x 5 is 123 for

fifty minus two thousand x 461 550 means

there's a change there's a difference of

60 19 we'll do that all the way down

we'll take the change all the way down

between these amounts and if this adds

up to zero and this adds up to zero and

then we took the change of all those

then that must add up to zero and that's

what we'll be working with so now we're

going to be working with this this are

the numbers that we will work with in

order to create our statement of cash

flow now once we have this what we're

going to do is we're going to take up

these numbers and we're going to find a

home for these numbers we have a basic

statement of cash flows on the right

hand side just an outline of it the

major piece of the outline you want to

take a look at is we have the cash flows

from operations the cash flows from

investing cash flows from financing

those are the three factors of the

statement of cash flows you want to

memorize those and our question then is

if we just go through all these accounts

we need to find a home in one of those

three sections and plug them in there as

long as we do that then as long as we

find a home for everything the total

will basically add up to zero obviously

because if we found a home for all these

and we have them go in the same way the

same sign whether it be plus or minus

over here then it has to add up to zero

so what we're going to do is we're going

to find a home for everything

accept cash why because cash is our

ending number so we're going to find a

home for all this stuff the cash balance

is going to be down here the increase in

cash so if we find a home for everything

except cash here and we subtotal all

that up and add that up then it'll add

up to the change in cash which is what

we're looking for when we're talking

about the flow of cash so we're going to

talk about what the cash flow is in

terms of the cash flow from operations

the cash flow from investing the cash

flow from financing we're going to go in

systematically one by one and everything

every change in every account on the

balance sheet accept cash and then if we

add those up we will then come to the

change in cash that of course is our

check figure if if that if that doesn't

happen that's like us not being in

balance and we have a problem and we're

going to set up a system so that we

reduce the number of problems that we

have as we go through the first thing

we're going to start off with is a net

income now this has to do with the

difference I want to talk briefly about

the difference between the direct method

and the indirect method so the cash

flows from operation is basically just

taking the income statement and

converting it from an accrual basis to a

cash basis if we thought about that the

most logical thing if I was going to ask

someone could you convert the income

statement from a accrual basis to a cash

basis what they would probably do is say

well yeah we would then try to figure

out what income is or revenue is on a

cash basis I would convert revenue to

receipts from customers and all the

expenses we would convert expenses from

an accrual basis to a cash basis and say

all expenses are cash paid for expenses

so then we would say you know rut you

cash received from customers minus

expenses that were actually paid with

cash gives us the net income on a cash

basis so that would be the direct method

in essence that we would do we're going

to use the indirect method for a couple

reasons the main reason is because

oftentimes generally accepted accounting

principles and other regulations require

it even if we use the direct method so

therefore

lot of companies will use it and because

of that most likely the direct the

indirect method is widely used so it's

going to be used far more probably

because of that second reason is that we

already figured out net income i mean we

figured out net income it might be a lot

of work it could be more work we would

think to basically recreate the entire

income statement on a cash basis it

might be easier for us to say hey let's

take what we have now we already figured

out what net income is and like back out

whatever we need to back out in order

for us to get to net income on a cash

basis that's basically what we're doing

so I'm not the direct method is good

i've worked in firms that use the direct

method i think it's easy for us to

explain the direct method to clients but

the indirect method is far more used

widely and if you can understand the

indirect method again that really gives

you an understanding of the relationship

between the accrual and cash basis

because we're kind of backing in

indirectly to these changes so it's good

to think through so the first thing

we'll start with is net income and the

first question is well the netting comes

on the income statement and we're

talking about changes in balance sheet

accounts let's go to the income

statement to find what net income is and

I'm going to try to find a home for all

of these first remember our goal is to

find a home for all these changes and so

I would like to find what net income is

as it relates to a change in a balance

sheet account so what is net income we

can think about this is basically these

trial balances are basically

post-closing meaning there's no income

statement here this is just the balance

sheet so the income statement has closed

out to the balance sheet where does the

income statement close out to and a

corporation closes out to retained

earnings therefore that retained

earnings amount here this increase from

125 5 to 2 30 must be partially and do

to retain during I mean net income

mainly due to net income so that change

in retained earnings is probably net

income so I'm going to note that in this

worksheet I'm always going to flip the

sign so that's just going to be a

conformity of this worksheet so whatever

the sign is here this is a negative

indicated by the brackets we're going to

flip the sign over here so we start with

net income which is a positive

for 500 so what happened here is that

retained interns went from 125 5 & a

credit up to 32 30 credit so we have

this 104 change we're going to assume

1045 change we're going to assume that

that is net income now if I go to the

income statement which i'm not going to

do now if I current income statement I

may have a number that's different than

the 10 4 or 5 it might be a different

number so I'm going to recognize that

and highlight that and say you know what

I'm going to look at the income

statement later and there might be

something else in retained earned its

it'll be easy for me to figure that out

I can go to go to the general ledger and

see if there's anything other than net

income posted to the general ledger

there's only going to be a few things

posted to the general ledger for the

retained earnings but I don't want to

start parsing out this number now so you

might ask what else could be in their

dividends could be in there so if we pay

dividends it might be affecting retained

earnings but again I don't want to start

making breaking these numbers up into

multiple different numbers I want to

first find a home for these numbers then

recognize the break out of those numbers

in a systematic way so recognize that

that might not be net income that's okay

I know it's part of net income going to

go back to it we will fix it at a later

time in an efficient way so then we're

just going to go down the list so we're

gonna skip cash because the indian thing

is going to be cash that's going to be

down here and we're going to go to

accounts receivable so accounts

receivable went from a debit of 80,000

750 up I mean down to 77 100 so first

question is that going to be in a cash

flow from operating investing or

financing at one way to think about it

is we can think that what's going to be

the other side of a journal entry that

basically increases accounts receivable

why does the council able go up when we

make a sale on account we debit accounts

receivable and we credit income revenue

that means the other account is a

revenue account which is an income

statement accounts and that's one way

you kind of think of that well that

means it must be operating because the

operating activity has to deal with us

changing the income statement from an

accrual basis to a cash basis so we're

backing into the

income portion by looking at the change

in the balance sheet accounts and the

change in the income statement account

related to accounts receivable is income

revenue which is an income statement

account therefore it must be going in

the cash flow from operations also note

that if we look at the cash flow from

operations we've got two sections here

in one section is generally called

changes in current assets and current

liabilities so basically all changes in

current assets and current liabilities

including accounts receivable would be

in this section within the operating

section now then there's the question of

does it increase or decrease the net

income from operations in this case if

we're thinking about a cash basis now

there's a couple ways to do that in

terms of a cheat sheet one is that in

terms of this worksheet we're just going

to flip the sign on everything so if

that's a negative I'm going to flip the

sign and negative positive you don't

even have to think about it because

that's the way the worksheet works other

way you could think about it in terms of

just having a cheat sheet being brackets

mean that we're going to decrease it if

it's an increase so that's kind of funny

but if if it went up increase then it's

going to be a decreased brackets in this

worksheet and if it's a decrease meaning

it is here when from 80,000 7 50 down in

7 71 then it doesn't have brackets and

it's not a negative it's going to be an

increase here so you want to have a

cheat sheet in mind but then you do want

to think through it if you're doing a

test or something or you're actually

making a cash flow statement you do not

want to thank through every time why the

accounts receivable decreasing is an

increase here you just want to you know

memorize the rule but it is good to

think through it a few times so we'll

think through it one time for accounts

receivable then we'll apply the rule so

all assets will be the same we'll go by

this rule and liabilities will be the

opposite so I'm going to think through

this one time and then we'll think the

same logic applies elsewhere where you

can think through it later if you so

what we want to do is think about what

happens when we have an increase in

accountancy well what happens what's the

journal entry when we have a decrease in

accounts receivable so when we have an

increase in accountancy but what happens

we're we made

sale on account therefore people always

more money and the receivable to go up

with a debit and revenue goes up with a

credit on the other hand when we

decrease accounts receivable what

happens is we receive cash and we reduce

the receivable account so if we if we

think about that in terms of the general

ledger we're going to debit accounts

receivable here on this transaction and

credit accounts table here so when

accounts receivable goes up what's

happening to the income statement is

that we're increasing net income net

income is going up because the income

went up income as net income as income

minus expenses but no cash was received

at that time so under a cash basis were

increasing the net income when we

shouldn't be because I'm an accrual

basis we should because that's when we

earned the money on the cash basis we

shouldn't because we haven't got any

cash therefore if over the long term

over the entire year this journal entry

happened more than this journal entry

then that means we recorded more sales

in which we have not yet received cash

then we receive cash therefore we need

to decrease net income if we're

converting from an accrual basis to a

cash basis is if on the other hand this

entry happened more more than this entry

that means that over time the receivable

would have going down and when it goes

down that means we got cash we reduce

receivable we got cash and we're not

recording revenue in this time period in

which we got the cash because under an

accrual basis we recorded last time

period you know when we earned the

revenue so and at this point in time

under a cash basis we got to say well we

should be increasing the net income

under a cash basis if a accounts

receivable goes down because this is

happening here and we got cash so we

have to record the revenue at the point

in time when we got cash so that's the

reasoning behind it but again you just

kind of want to learn the rule here and

the rule will be either in the worksheet

that you make or you want to have kind

of like a cheat sheet like this all

right so then we're just going to go

down the list we got inventory Knicks so

inventory is an acid it's going to

follow the same rule as the receivable

we know the other side of inventory

oftentimes is we're going to sell the

inventory therefore we're going to

reduce the inventory the other side as

an expense cost of goods sold cost of

goods sold as part of the income

statement therefore the inventory is

going to go into the operating cash

flows from operating and note that we

can kind of see a cheat sheet on that

and we know that the changes in current

asset and liabilities go in the

operating section so that means that

this is going to go into the operating

section it went in 2014 from 257 I down

to 246 therefore we're going to follow

our rule and we're going to increase the

statement of cash flows in the operating

section by that change 10 100 and again

this worksheet we're just going to flip

the sign that's a negative here it's a

positive here you can also see the cheat

sheet here an increase is going to be a

negative a decrease is going to be

positive if we're talking about acids so

as of now the operating section we

started with net income then we're going

to increase net income by this increase

it by that that's what's going to go

here so far let's keep going and then we

got the prepaid expenses same thing as

an asset and it's going to follow the

same rules it's a current asset if we

think about the other side of prepaid

expenses it's going to be if the most

comments like insurance prepaid

insurance so the other side of prepaid

insurance is insurance expense which is

an income statement accounts therefore

it's part of the operating activities

it's also a current asset and therefore

it goes into this section of the

operating activities it's going to

follow the same rules as all assets in

this section over the operating

activities in debt in this case it's

going from 17 down to 15 1 that means

it's going to be added back for similar

logic as the accounts receivable account

and also in this worksheet we know that

all negatives is going to be positive

we're just going to flip the sign on

everything so at this point in time

we've got the 1045 in the operating Plus

this Plus this Plus this that's what's

going to go here at this point in time

let's move the next account next count

is equipment notice equipment is not a

current asset or liability so we got to

think through this more deeply now is it

going to be operating is it going to be

investing is it going to be financing

and in this case if we think of

equipment when we buy equipment what's

what's the effect on equipment on the

journal entry well if we bought

equipment then we're going to debit

equipment and we're going to credit a

cache or some kind of loan whatever we

bought it for and neither of those

accounts no matter what they are is not

an income statement account and

therefore since the operating activity

has to do with the income statement it's

not going to be an operating so then we

have investing or financing left over

and it's actually in investing and this

used to confuse me when it wasn't

investing because when I used to think

of investing I used to think if that's

like stocks and bonds and equipments not

investing it's an acid but but when we

think about it obviously when we buy

equipment we're putting money into

equipment so that we can use it in order

to help our purpose which is to generate

revenue in the future so we are in that

sense investing in the equipment to help

us generate revenue in the future

therefore it is an investment we can see

that it went from 200 in 2000 x 42 up to

110 750 so we're just going to make an

assumption for now I mean again I could

go look at the GL and see exactly what

happened it's not going to be a lot of

activity in an equipment account

generally because we don't make too many

purchases of equipment over the years we

look at the t account but I'm just going

to assume overall that we bought

equipment and we're going to assume so

we're going to say it's going to be cash

paid for the purchase of equipment and

notice what I'm assuming is we pay cash

for it and I very well may not be true

because you know if I bought a lot of

equipment we might have financed it and

very likely that we did but I again I

don't want to start parsing off this

number until because it could get very

complicated when when we start looking

at different pieces of equipment we

purchased and how we financed it this

number could get split up in very

complicated ways and that and before I

do that I want to find a home for all

the whole numbers and then go back and

start parsing them up so I'm going to

make it yelling and say yeah I recognize

that it's very likely that i did not pay

cash for that equipment but i'm gonna

you know think about that at a later

time

so we're going to move on to the

accumulated depreciation so once again

not a current liability or asset

therefore it's not necessarily in the

operon activity we have to think about

it a little bit deeper and we're going

to say well what's the journal entry

that would be affecting a accumulated

depreciation and that's the one where we

were going to depreciate the equipment

in this case we're going to debit

depreciation expense credit accumulated

depreciation therefore this increase

here the other side of it isn't expense

it's it's depreciation expense so that

that's an income statement account so it

is going to be in the operating activity

even though it's not part of the current

assets and current liabilities because

the other side of it is depreciation so

rather than us calling it this is going

to be the change and accumulated

depreciation we're going to recognize

what the income side of that is what the

income side of that change is in this

case which is just depreciation we're

going to put it up here in this

subsection which says income statement

item not infecting cash what does that

mean it means that within this net

income of 1045 there is depreciation

which had nothing to do with cash

because we debit depreciation expense

and credit accumulated depreciation

which has nothing to do with cash at

that point in time at that point in time

no catch was affected at that point in

time depreciation expense decreased net

income and on a cash basis it shouldn't

have therefore that 1045 under a cash

basis needs to go back up by the

depreciation of 15 750 because we put it

down the coordinate accrual basis and

under cash basis it shouldn't have gone

down so it's got to go back up so now

we've got under the operating we got the

1045 plus the 15 Plus this Plus this

Plus this that's what this is going to

be so far so let's go to the next one

next one we've got accounts payable

liability now note once again it's a

current liability so we kind of know

it's going to go in the operating

section right here because it's in that

subsection if we think about when does

when what's the journal entry for

accounts payable what we could think

what we bought something like an expense

maybe on account

we would debit some kind of expense

credit accounts payable and therefore

the expense is an income statement

account and the income statement account

has to do with a operating activities

and therefore it should go in the

operating activities and you might be

saying well what if we bought like

inventory which is an asset we debit

inventory and we credit the payable and

that's true but you know even inventory

ultimately it's going to be expensed and

costing it's sold so in any case it's

the easiest way to think about it is

that we bought an expense and debit

accounts payable and if you think about

it that way and you want to think about

liabilities you can go through the same

reasoning that we did for the accounts

receivable and try to think of why it's

going to follow these rules what what

all the rules going to be will if it

went from first of all the rule is it's

it's a positive number here we're going

to flip the sign and we made it a

negative here that's the rule for the

worksheet second of all we know that it

went from 2000 x 4 10 2 down to 17 750

and if it decreases it's going to do

that we're doing the opposite of all the

assets it's going to decrease the cash

flow from operating or cash flow from

operating here therefore it's going to

be a negative now again you just want to

know the rule here's the cheat sheet on

the rule it's going to be obviously the

opposite of all assets and but if you

want to think through it think through

it a few times but have the cheat sheet

there if you're going to make the

problem or take a test on it so now the

operating activity has the net income

plus this plus this plus this plus this

minus this that's what's going to go

here let's move on to the next account

next we've got short term notes payable

so a note payable obviously now I well

it could be a current liability so you

would think actually could go there but

it's a note it's a note payable however

and note what win with a note payable be

affected we're saying it went from 10 up

to 15 from 2000 x4 up to 2000 x 5 x 5000

why would we owe more money on a notes

payable well maybe we borrowed money and

if that happened we would debit cash and

we would credit

payable and that has nothing to do with

the income statement and therefore

wouldn't be in the operating activity

now notice we could have borrowed

something other than cash we could have

borrowed I mean we could have bought

something and Finance did it but even in

that case it wouldn't be an operating

activity so I'm one thing I'm going to

make an assumption i'm going to say well

it's either investing or financing

clearly if we're if we're loaning and

borrowing money that's that's actually a

financing activity it's going to be down

here in the financing section and so

we're going to follow our same rules i'm

going to flip the sign it's a negative

year so i'm going to get a positive here

and the logic being that well it went up

there for i'm going to assume that we

borrowed cash and again i'm gonna make

that yellow because I mean I could have

financed something I don't know what

really happened I got to go to the geo

and pull out whatever happened in order

to figure that out but before I go

pulling the GL and whatnot and parsing

this number up I'm going to make the

easy assumption first just so we can

find a home for all these numbers then I

want to make sure that we are in balance

or we are tied out to the change in cash

then go back and parse that out alright

so let's go to the next one where we

have the long term note payable same

concept right if we bought if it went

from here up then we're going to it has

nothing we can assume we borrowed more

money with a debit cash we're going to

credit the note payable and what's going

to have nothing to do with the income

statement therefore it has nothing to do

with operating we are again financing or

borrowing money so that's going to be

down here in the financing and again I'm

going to make this assumption it's it's

very likely that something else happened

I'm gonna go look at the Geo I'm going

to figure it out exactly what happened

but if it went from here up then I'm

assuming that we borrowed cash now if it

went down of course I would seem that we

paid cash on the note so it's going up

I'm and soon we borrowed cash could it

could have been something else that

happened we're going to go in there

we're going to dig through that there's

not going to be too many transactions in

the notes payable general ledger

hopefully because we didn't like borrow

money all year long unlike the cash

count obviously would hatch a lot of

detail than the GL so we're going to

parse that out later and make it yellow

and say yeah I know that we might have

something else going on

but I'm going to find a home for all

these accounts for it's going to be in

balance then we'll go back and parse

those out all right then the next 2 i'm

going to put these two together common

stock paid in capital y because note

that common stock is us the issuance of

stock that's kind of like the investing

of the stock now when we think about

common stock there's two kind of things

when we buy common stock usually if we

buy comments lock on stock market we're

now buying it from the company we're

buying it from other investors it's not

the company issuing stock if the company

issued stock then the company's the one

receiving the money that doesn't happen

like all the time so the common stock

may not change a lot from year to year

of course an example problem we want to

have an example of the common stock

changing so we can put it in the example

problem so it went from 200 up to 2 15

meaning we issued stock so we issued

more stock got more investment in the

company in that way now we also have an

additional paid-in capital why because

remember when we issue stock we might

issue it at a par value which is just

like a made-up value so that we can have

an even value to the amount posted in

the common stock however when we sell it

we're going to sell it for whatever we

can which most likely will be higher

than the par value so the additional

paid-in capital is the amount of money

that we issued the stock for above the

par value that's why these two are

basically related that's why I'm going

to record them related so we're going to

make the assumption that we debited cash

we sold common stock for cash so and

that means that the change this 15 and

the 30 is us is that happening so not

neither part of those accounts are part

of the income statement doesn't have

anything to do with operation it's going

to be financing why do we issue stock

because we're financing the company

we're trying to get money into the

company through a financing process and

therefore we're going to assume them

once again that cash received from

issuing of stock is the effect he I'm

not going to make that yellow because I

happen to know that we don't need to dig

down on that so it's going to go up and

therefore we're taking that changed 15

or 30 flipping the sign so that 45

negative flipping it to a positive we

received cash so in the cash flows from

financing we have this Plus this Plus

this that's what's going to go here so

far now that's what we have so now we

found a home for all of these accept

cash and therefore we can add this up

and see if the difference adds up to

cash if we have all these going the

right way member we flip the sign on all

of these therefore if we flip the sign

on all of these it should be equal to

the 60 19 let's see if that's the case

we got to have a net income this is the

cash flow from operations net income

plus this plus this both of this minus

this adds up to this 51 650 that's the

cash flow that's how much cash we have

received from operations if it was a

negative we would have a cash used from

operation cash flows from the F

investing activities all we have it is

this 62 250 it's a negative so it's a

decrease so we're going to say net cash

flows from investing activities is a

decrease in cash flows from investing

activities 62 250 operate financing

activities we get 25 + 2 20 25 + 2 45 so

we borrowed money in this case it looks

like and we issued stock so it's all

increases we're going to add those up 72

five then the 51 650 plus mine is n plus

62 250 plus the 72 five add up to 60 19

yes that adds up to our change in cash

so we are in balance so far so that's

great that we're looking good so far

however of course we have these issues

where we're going to go back to some of

these accounts and say you know we

recognize that there's some issues that

we're going to figure out and find out

systematically how to fix those and see

if there's any changes that need to be

made to certain accounts now the first

yellow account we had was actually net

income that's where we started we

started off with account we were kind of

questioning to order but we didn't want

to parse out the account at that time

because we wanted to go back and do it

systematically now we know we are in

balance here what we're going to do I'm

going to do something similar to kind of

like an adjusting trial balance and say

let's make an adjusting column and let's

increase it similar

to a debit and credit make sure that we

increase and decrease something so that

we end up with something notice this is

just adding up this column in this

column that is imbalanced meaning that

we still equal the change in cash 61 9

so if we go back and say hey net income

is wrong I know what net income is it's

this it's this well 158 100 so if i put

that if i start with that then i have to

change it from the 1045 it's going to go

increase by the 5036 to that number so I

got to increase so I got an increase net

income but if I do that then it's going

to throw me out of balance so what I got

to put the other side somewhere so we've

got to figure out what that change is

let's do it systematically well we're

going to parse out this number between

the two components if we go look at the

GL it would tell us if it would tell us

the activity if we look at a book

problem then it'll give us something

like this it'll say e says that declared

paid a cash dividend we got to just no

cash dividend that means that a journal

entry would look like this mean if we

paid a cash dividend that means that we

debited the retained earnings because

we're taking it out of the retained

earnings that was the difference that we

used to come up with this one oh four or

five that we assumed with all net income

and then we credit cash so that's the

journal entry this would be that now

let's think about that journal entry in

terms of a change to our cash flow

statement what two accounts what two

names on our cash flow statement can

relate to this journal entry to make us

have anythin adjustments and of course

net income has to change so we know that

net income has to go from 1045 up by

that amount to in order to get to our

adjustment our net income which is on

the income statement here and the other

side then must be the cash we paid for

the difference the cash paid that was

paid for the dividend so we're going to

create a new account I say cash paid for

dividends we're going to put that as

part of the fight as part of the

financing activities which is where the

dividends will go and it's going to go

from zero and now we go at the decrease

in cash decrease in cash

so now we had a chain we had a change to

our operating activities went from here

to here we had an equivalent change down

here in our financing activities we're

still in balance so we're that's not

going to throw us off we're good that's

exactly what happened let's go back

let's go find out our next difference

and see what that is so the next one is

depreciation here so again what what

would we do is we look on the income

statement and say well as depreciation

on the income statement equivalent to

this 15 750 because you know we got to

that depreciation by looking at the

change in the accumulated depreciation

which is usually the recording of the

depreciation expense that's how we came

up with is 15 750 but if we look at the

accumulated depreciation there might be

something else affecting it so we have

to compare that we could converse

compare this to the income statement say

hey what's depreciation expense on the

income statement well it's it's 38 6

that's not the change in the accumulated

depreciation well that means that if I

was going to take it from the income

statement then I would have to put this

38 6 that's what should be there that's

what we have to increase net income by

in order to adjust for the depreciation

expense that we'd reduced it by and if I

was to do that then I would have to

increase this number by 22 850 to bring

it up to that 38 6 if I do that well

that's going to throw me out of balance

you know so we got that we have to do

something else so let's go think about

let's go look at the GL and think about

okay what's on the GL related to

accumulated depreciation other than just

record an appreciation expense what else

could affect it in this case we sold

equipment when we sell equipment we also

have to account for the accumulated

depreciation that is on the books in

relation to that particular piece of

equipment now this one can get little

confusing if you can get this one then

you have a good understanding note how

this one can really throw you off if we

started out with depreciation instead of

backing in the depreciation because if

you're at this point in time and you go

to your supervisor and say behave this

depreciation is throwing me off but I

know that I'm on track I got everything

in balance but this one thing I got to

figure out how to adjust this change to

account for that this journal entry

related to the depreciation we can dig

that out rather than going in and saying

my entire thing doesn't work and I don't

load so if we figured out this journal

entry what would be the journal entry

related to that we can go on at our geo

we can double click on the on the GL and

our software and we come up with say

okay this is what happened we sold the

equipment we got 20 6054 if that's the

cash related to it we took the equipment

off the book so that particular piece of

equipment cost us 51 we had to take that

off equipments add edit we credited the

equipment to take it off the books at

51,000 then we also have to take the

accumulated depreciation related to the

equipment off the books which is what

most people often forget and so

obviously all equipment has this other

account related to it accumulated

depreciation which we must take off the

books so we've got to figure out what

how much of the accumulated depreciation

is related to this one particular piece

of equipment make sure to take that off

the books and then the difference is

going to be the gain or loss in this

case a loss so we'd have to dig out this

journal entry and say okay that's the

journal entry how can we then convert

this journal entry into basically what

we need in terms of these accounts up

here so that we haven't you know

something that's imbalance that will

keep us in balance so we know that we

have to fix the depreciation account

here so we know that the depreciation is

going to be going up up by the 22 850 in

order to equal the 38 6 which equals

what's on our income statement then we

have the cash received from the sale of

equipment now I mean we got cash up here

we can see the 26 that we received and

we didn't record that anywhere we got we

sold equipment we didn't we didn't put

that on our cash flow statement so we

got cash from the sale of equipment and

if we receive cash member equipment is

an investment therefore it's going to go

in the investing activities we're

actually gonna create a new line you

might have been wondering why there was

a blank line there we're going to create

a new line called cash received from

investing activities going to put that

in here i'm going to add that 26 here

that's going to be part of it so we're

going to that elite the other piece part

of that now this equipment is credit to

equipment where did we put that where

did we put the change to equipment on

our statement of cash flows we put that

into

cash paid for the purchase of equipment

but this part of that decrease had to do

with this sale of equipment so this

51,000 wasn't part of the cash paid to

purchase equipment in this case and

that's why this 51 is going to be part

of this line item here so this was the

original change we're going to we're

going to put that 51 a negative and say

that if we paid all cash for the

equipment that we purchased we must have

paid 113 250 for it now again we that

might not be the end of the story

because we could have financed part of

that or there could be other

transactions involved but we're going to

make that adjustment here and then we

have the final loss now notice that this

loss if it has to do with equipment we

want anything related to it to be in the

investing activity and under the income

statement this loss here so we've

already recorded the cash related to

this in the investing section we don't

want any of the gain or loss or related

to it in the operating section and when

we recorded this lawsuit was recorded in

the net income in the operating section

therefore up here we have this we we we

had this loss included in this 1045

that's where this piece is going to go

we're going to create a new line which

again you probably were wondering why is

there like a blank blue line there we're

going to say that hey we we brought this

net income down by this loss and we

don't want that loss related to the

equipment here we want anything related

to the equipment to be in the investing

activity therefore we're going to

increase the loss here so that's the

adjustment so this idea here being that

we're still kind of in bounced we're not

dealing with debits and credits but

we're making this adjustment in such a

way that we can figure it out and still

remain in this change in cash being the

same and notice I'm checking this figure

down here because this figure should be

pulling over here as well so I'm just

looking as of this line item at this

time right now alright so then we have

the next item that happened so we have

that we have the purchase of equipment

we're taking a look at this next yellow

item which we had

yellow item 4 and we're going to dig

down on that and say we had a purchase

of equipment is there anything else

related to that in basically the

equipment account and here we had it we

had a purchase of equipment which cost

113 250 and we paid cash 45 to 50 for it

so what must have been the journal entry

we can go thick to the GL find the

journal entry and we must have debited

cash 113 250 I'm sorry tablet equipment

for the cost of equipment 113 250 we

credited cash that's how much we put

down on the equipment then we financed

the rest for the 70,000 so then the

question is well how are we going to

convert that to basically the accounts

over here in order to make this cash

paid for the purchase of equipment what

it should be on a cash basis and part of

that is going to be here now remember

last time we brought it up by the 51,000

from the last transaction and we were at

113 250 in this amount and that would be

what how much cash we had paid if we had

paid all cash now this journal entry

saying we didn't pay all cash we pay we

financed part of it and we only paid 43

250 in cash therefore we're going to

bring it down by the 70 so now we're

adding to this cell as the 51,000 from

last time plus the 70 so that we end up

with the cash that was actually paid for

equipment which was the 43 250 the other

side of this is remember what we had was

the change in the debt down here it was

the 20 25 and part of that now that we

dig down into it had to do with this

this debt change from this transaction

therefore the other side of this is

going to be going to the cash paid for

long-term debt and we had to actually

flip the name of the notes now we've got

it was cash received now we realized

that it really it's a cash payment here

so we flipped the name and said the 20

25 minus the 70 brings it down to what

it should be which is the 47 5 so now if

we look at the final process here notice

that last time we basically have been

stopping at the change in cash the 60 19

the 60 19

and that of course adds up to the 60 19

up here the change in cash so remember

that's what we found a home for

everything and we and we looked at the

change in cash now when we think about

other financial statements that we don't

see the change in cash on the financial

statements if we only have the financial

statements as of two thousand x 5 so we

don't want to end the fight the cash

flow statement as the change in cash we

really want to end it with the Indian

cash balance and that's easy enough to

do so right we're going to say well if

that's the change in cash we're just

going to say hey let's just let's just

add that to the beginning cash balance

and we'll back into the cash balance as

of the end of the time period so really

this is our verification figure this is

the easiest one for me to use when we

are creating the cash flow statement but

of course when we're comparing the

statements we want to end with the

amount of cash at the end of the time

period so if this is the change and we

add to it what was in there at the

beginning which is this number then we

will end up with the cash flow as of the

end of the time period that point in

time on the balance sheet so that we can

compare the cash flow to the balance

sheet which would be equal clip to this

number here and again if we do this

change notice what we have now is we

started with these this column

represents us finding a home for all of

these numbers without thinking about

parsing them out into their separate

parts this column represents us parsing

them out going through the thought

process and parsing them out in a

systematic way and note how some of

those were pretty complicated to the

first the parse those out if we try to

do that as we go it is very easy to get

out of whack and then get to the end of

the problem not to be tied out to the

change in cash and have no idea really

exactly where the problem is at so i

recommend putting together a system so

that you can then think through those

problems and take it to a supervisor or

something and have a very pinpoint place

at where you are out and try to be able

to explain as clearly as possible what

the problem is to save you know as much

time as possible then note that we can

have the change over here that will will

result so our ending numbers are here so

here's our ending number

here's our cash flow that we can then

plug into a cash flow statement or just

you know hide these lines here these are

ending numbers here's are the names of

the items within the cash flow

statements again if you're working a

problem in cash flow there's two types

of things you're gonna have to know you

have to memorize operating investing

financing and if you know which items go

in which section you can get a lot of

points on that if you're actually going

to create a cash flow statement then you

really want to come up with a systematic

way to do it because it can be a

somewhat difficult to make sure that

everything ties out towards the end so

we're now able to define a statement of

cash flows created statement cash flows

explain a process of creating a

statement of cash flows designed to

limit mistakes define the indirect

method

you

Charles a1029488@live.ouhk.edu.hk