1. Statement of Cash Flows
Professor Eric Carstensen
MiraCosta College

2. Why do We Prepare this Statement?
Reconciles Net Income to the amount of Cash on the Balance Sheet
Credit Sales and Purchases
Borrowing / Repayment of Loans
Purchases and Disposal of PP&E
Changes in Contributed Capital
Payment of Dividends
Reports Sources of Funds and Uses of Funds

3. General Format of the Statement (Indirect Method)
Net Income
add:
depreciation expense
decreases in Current Assets
increases in Current Liabilities
loss on disposal of assets
less:
increases in Current Assets
decreases in Current Liabilities
gain on disposal of assets
equals:
Net Cash Flow from Operating Activities
purchase of PP&E
disposal of PP&E
purchase / sale of other investments
Net Cash Flow from Investing Activities
change in short term notes payable
change in long term debt
change in paid-in capital
payment of dividends
Net Cash Flow from Financing Activities
change in cash
cash at beginning of period
cash at end of period

4. Financials and Other Information
EJ Company's Year 2 Income Statement:
Comparative Balance Sheets for Two (2) Years:
Sales
$ ,000
Assets
Year 1
Year 2
COGS
570,000
Cash
20,000
40,000
Gross Margin
320,000
A/R
110,000
130,000
Op. Expenses
210,000
Inventory
190,000
170,000
Op. Income
Prepaids
10,000
Loss on Disposal
Total Current Assets
340,000
350,000
Income Before Taxes
90,000
Taxes
30,000
Long Term Investments
Net Income
$ ,000
Property, Plant & Equipment
420,000
550,000
EJ Company's Year 2 RE Statement:
Accum. Depreciation
(110,000)
(120,000)
Net Property, Plant & Equipment
310,000
430,000
Year 1 Retained Earnings
$ ,000
add: Net Income
60,000
Total Assets
$ ,000
$ ,000
less: Dividends
equals: Year 2 Retained Earnings
$ ,000
Liabilities
A/P
140,000
120,000
Unearned Revenue
Other Information:
Total Current Liabilities
160,000
150,000 a.
Equipment that had cost $90,000 and on which
Long Term Note Payable
there was $40,000 of accumulated deprec-
iation was sold in Year 2 for $30,000 cash.
Total Liabilities
300,000 b.
Replacement equipment was purchased for
$220,000 in cash.
Equity c.
Year 2 depreciation expense was $50,000.
Common Stock
250,000 d.
Cash dividends of $10,000 were paid in
Retained Earnings
the current year.
Total Owners' Equity
360,000
510,000
Total Liabilities & Equity

5. Cash Flow from Operating Activities
Net Income
60,000 1
we add back depreciation as it is a non cash expense;
add:
depreciation expense
50,000
(debit deprec expense, credit accum deprec) 2
decrease in Inventory
20,000
we add back the change in inventory as it is also non-cash; 3
decrease in Prepaids
10,000
(debit COGS, credit inventory) 4
increase in Unearned Revenue
we add back change in prepaids for the same reason; 5
loss on disposal of assets
(debit insurance expense, credit prepaid insurance) 6
less:
increases in A/R
(20,000)
unearned revenue happens when we receive cash and have 7
decreases in A/P
yet performed a service / delivered a product
equals:
Net Cash Flow from Operating Activities
130,000
we add back the loss on disposal to negate its effect on net
income; we will account for cash as part of investing
we subtract the increase in A/R; we recognized sales but
did not receive cash
we subtract the decrease in A/P, as cash payments are used
to reduce this liability

6. Cash Flow from Investing Activities1
purchase of PP&E
(220,000) 2
disposal of PP&E
30,000
equals:
Net Cash Flow from Investing Activities
(190,000)
purchase of PP&E is subtracted as it is a use of cash
(debit PP&E, credit cash)
cash received at disposal is added as it is a source of cash
(debit cash, debit accumulated depreciation;
credit asset, credit loss on disposal for our example) *
We would also include and gain or loss on sales of other investments
(such as loans to subsidiaries, stock from another company, etc.,)

7. Cash Flow from Financing Activities1
change in long term debt
(10,000) 2
change in paid-in capital
100,000 3
payment of dividends
equals:
Net Cash Flow from Financing Activities
80,000
change in long term debt is subtracted, as it is a use of cash
(debit long term debt, credit cash)
change in paid-in capital is added, as it is a source of cash
(debit cash, credit paid-in captial)
payment of dividends is subtracted, as it is a use of cash
(debit dividends, credit cash)

8. Summary Statement of Cash Flows
Net Cash Flow from Operating Activities
130,000
Net Cash Flow from Investing Activities
(190,000)
Net Cash Flow from Financing Activities
80,000 1
change in cash
20,000 2
cash at beginning of period 3
cash at end of period
40,000
equals the three net cash flows added together
from year 1 balance sheet
equals change in cash plus beginning cash
==> which is also the amount of cash shown on year 2 balance sheet

9. Complete Statement of Cash Flows
Net Income
60,000
add:
depreciation expense
50,000
decrease in Inventory
20,000
decrease in Prepaids
10,000
increase in Unearned Revenue
loss on disposal of assets
less:
increases in A/R
(20,000)
decreases in A/P
equals:
Net Cash Flow from Operating Activities
130,000
purchase of PP&E
(220,000)
disposal of PP&E
30,000
Net Cash Flow from Investing Activities
(190,000)
change in long term debt
(10,000)
change in paid-in capital
100,000
payment of dividends
Net Cash Flow from Financing Activities
80,000
change in cash
cash at beginning of period
cash at end of period
40,000