CHAPTER 4 Structure of the Balance Sheet and Statement of ...

CHAPTER 4CHAPTER 4

Structure of the Balance Sheet and Statement of Cash Flow

Adopted from Slides Authored by Adopted from Slides Authored by Brian LeventhalBrian Leventhal

University of Illinois at ChicagoUniversity of Illinois at Chicago

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RoadmapRoadmap

Measurement conventions of Balance Sheet Items

Cash Flow Statement– Indirect approach– Direct approach

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I.I. Classification Criteria and Measurement Conventions Classification Criteria and Measurement Conventions for for Balance Sheet Accounts Balance Sheet Accounts

A. A classified balance sheet groups similar items so that important relationshipsrelationships are revealed.

1. Assets:a. Current assets.b. Long-term investments.c. Property, plant, and equipment.d. Intangible assets.e. Other (long-term) assets.

Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity

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2. Liabilities:

a. Current liabilities.b. Long-term liabilities.


5



3. Owners’ equity:

a. Capital stock.b. Additional paid-in capital.c. Retained earnings.


6

Motorola Balance Sheet

Dec 31

2001 2000

ASSETSCurrent Assets

Cash & Cash EquivalentsCash & Cash Equivalents $3,345 $ 1,453$3,345 $ 1,453 Short-Term Investments 699 171 Accounts Receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $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.

7


Dec 31

2001 2000

ASSETSCurrent Assets

Cash & cash EquivalentsCash & cash Equivalents $3,345 $ 1,453$3,345 $ 1,453 Short-Term Investments 699 171 Accounts Receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531

I.I. Classification Criteria and Measurement Conventions Classification Criteria and Measurement Conventions for for Balance Sheet Accounts Balance Sheet Accounts 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 current market

priceprice.

8


Dec 31

2001 2000

ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453

Short-Term InvestmentsShort-Term Investments 699 699 171 171 Accounts Receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $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.

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I.I. Measurement Conventions for Balance Measurement Conventions for Balance

Sheet AccountsSheet Accounts Short-term investments:Short-term investments:

1. The intended holding period of the company that owns the securities determines how the debt and equity securities are measured on the balance sheet.

a. Debt securities that the company intends to hold to maturity is carried at amortized cost.

b. Debt and equity securities held for short-range investment purposes are carried at the market price.

10


Dec 31

2001 2000

ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453

Short-Term InvestmentsShort-Term Investments 699 699 171 171 Accounts Receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531


Some investments

will be carried at original

(historical) cost, some at amortized

cost, and others at current cost.

11


Dec 31

2001 2000

ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453 Short-Term Investments 699 171

Accounts Receivable, net 5,125Accounts Receivable, net 5,125 5,057 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531


Gross accounts

receivable equal the face

amounts arising from

past transactions.

12


Dec 31

2001 2000

ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453 Short-Term Investments 699 171

Accounts Receivable, net 5,125Accounts Receivable, net 5,125 5,057 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531

I.I. Classification Criteria and Measurement Conventions Classification Criteria and Measurement Conventions for for Balance Sheet Accounts Balance Sheet Accounts Gross

accounts receivable are reduced

by an estimateestimate of the accounts

receivable that will

ultimately not be

collected.So, Net Accounts Receivable are carried at net net

realizable valuerealizable value.

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Historical Cost

- - Accum.Deprec.

Book Value(Net)


Dec 31

2001 2000

ASSETS Total Current Assets $16,503 $13,531

Property, Plant & Equipment,net 9,246 10,049Property, 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:

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.

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Dec 31

2001 2000

LIBILITIESCurrent Liabilities

Notes payable & current portion of long-term debt $2,504 $ 2,909

Accounts payableAccounts payable 3,015 3,015 2,305 2,305

Accrued liabilities 6,897Accrued liabilities 6,897 6,226 6,226 Total Current Liabilities 12,416 11,440

Long-term debt 3,089 2,633

Deferred Income Taxes 3,481 1,188

Other liabilities 1,513 1,245

Total Liabilities $16,503 $13,531

I.I. Classification Criteria and Measurement Conventions Classification Criteria and Measurement Conventions for for Balance Sheet Accounts Balance Sheet Accounts Accounts

payable &

accrued liabilities

are on the balance sheet at the amount of the original

liability

(historical cost).

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Dec 31

2001 2000



Accounts payable 3,015 2,305

Accrued liabilities 6,897 6,226

Total Current Liabilities 12,416 11,440

Long-term debt 3,089Long-term debt 3,089 2,633 2,633Deferred Income Taxes 3,481 1,188

Other liabilities 1,513 1,245


I.I. Classification Criteria and Measurement Conventions Classification Criteria and Measurement Conventions for for Balance Sheet Accounts Balance Sheet Accounts 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.

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Dec 31

2001 2000



Accounts payable 3,015 2,305

Accrued liabilities 6,897 6,226

Total Current Liabilities 12,416 11,440

Long-term debt 3,089 2,633

Deferred Income TaxesDeferred Income Taxes 3,481 1,188 3,481 1,188 Other liabilities 1,513 1,245



Deferred income taxes

are reported at their

undiscounted amount.(Original Amount)

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Dec 31

2001 2000

STOCKHOLDERS’ EQUITY Preferred stock, $100 PV

Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PVCommon Stock, $3 PV

Authorizes shares: 2001&2000, Authorizes shares: 2001&2000, 1,4001,400

Issued & outstanding:Issued & outstanding:

2001,612.8;2000;601.12001,612.8;2000;601.1 1,838 1,838 1,804 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

Common Stock

is reported at historical

par value.

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Dec 31

2001 2000


Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PV

Authorizes shares: 2001&2000, 1,400

Issued & outstanding:

2001,612.8;2000;601.1 1,838 1,804

Additional paid-in capital 2,572Additional paid-in capital 2,572 1,894 1,894




Additional paid-in

capital is reported at historical

cost as the excess of

original issue price and

par value.

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Dec 31

2001 2000


Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PV



2001,612.8;2000;601.1 1,838 1,804


Retained earnings 8,780Retained earnings 8,780 8,254 8,254



This measures the net of the cumulative earnings

less cumulative dividend

distributions of the

company since

inception.

This is reinvestment

to grow!

20


Dec 31

2001 2000


Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PV



2001,612.8;2000;601.1 1,838 1,804


Retained earnings 8,780Retained earnings 8,780 8,254 8,254



Since different

measurement bases

pervade the balance sheet, &income

statement so

retained earnings

is a mixture of historical

costs, current values, and

present values.

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Dec 31

2001 2000


Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PV



2001,612.8;2000;601.1 1,838 1,804



Non-owner Non-owner changes to equitychanges to equity 3,154 2703,154 270


This measures the

net of the cumulative

unrealizable gains and

losses from other

comprehensive income

components recognized in

current and prior years

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Dec 31

2001 2000


Authorized shares:

.5 (non issued) ---- ----

Common Stock, $3 PV



2001,612.8;2000;601.1 1,838 1,804



Non-owner Non-owner changes to equitychanges to equity 3,154 2703,154 270


This account is debited for unrealized

losses and

credited for unrealized

gains.

All amounts are shown

net of tax effects.

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II. Statement of Cash Flows:

2.The connection between successive balance sheet positions and the statement of cash flows can be shown:

a. Assets = Liabilities Owners’ equity

b. Cash Noncash assets = Liabilities Owners’ equity

c. Cash = Liabilities Noncash assets Owners’ equity

d. Cash = Liab Noncash assets Owners’ equity

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2. The connection between successive balance sheet positions and the statement of cash flows can be shown:

Cash = Liab – Noncash assets 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.

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3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.

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a. Reported net income will not equal cash flow from operating activities because of differences between accrual-based and cash-based accounting.

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b. Changes in cash may be caused by nonoperating investing activities like the purchase or sale of property, plant,

and equipment.

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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.

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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).

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Let’s Look at an

Example of Cash & Accrual

Accounting

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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 StatementOperating Activities

Net Income

Cash Flow StatementOperating Activities

Total Operating Cash Flow

Investing Activities

Financing Activities

Change in CashStock Issuance $10,500

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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 StatementOperating Activities

Net Income






Rent Expense ($24,000)

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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 StatementOperating Activities

Net Income





Change in Cash

Stock Issuance $10,500


Bank borrowing $10,000

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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.


Net Income





Change in Cash




Equipment purchase ($15,000)

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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 StatementOperating Activities

Net Income





Change in Cash





Adverting Rev.(Accrual Actg.) = Revenue EarnedServices Performed = $65,000

Advertising Revenue $45,000Advertising Revenue $65,000

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6. By year-end, the company used and paid the following operating costs: (a) utilities $650, (b) salaries, $36,250 and (c) supplies $800.


Net Income


Total Operating Cash FlowInvesting Activities






Advertising Revenue $45,000Advertising Revenue

$65,000Salary Expense ($36,250)

Utilities Expense (650)Salary Expense

($36,250)

Utilities Expense (650)

Supplies Expense (800)Supplies Expense (800)

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7. The company had accrued (unpaid) expenses at year-end as follows: (a) utilities $75; (b) salaries $2,400; and (c) interest $900.


Net Income








Advertising Revenue $45,000


Salary Expense ($36,250)Utilities Expense (650)

Salary Expense ($36,250)



Utilities Expense(Used) = $650 + $75 =$725

(725)

Salary Expense(Used) = $36,250 + $2,400 =$ 38,650

(38,650)

Interest Expense(Used) = $10,000*.12*9/12= $900Interest Expense (900)

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8. Supplies purchased on account and unpaid at year-end is $50. Supplies on hand at year-end is $100.


Net Income







Interest Expense (900)







(725)


(38,650)

Supplies Expense(Used) = $$ Purchased – End. Supplies

$750 = ($800 + $50) - $100

(750)

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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.


Net Income









Depreciation Exp. (2,250)




Supplies Expense (800)


(725)


(38,650)Supplies Expense

(800)(750)

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10. The office space was used for 9 months $18,000.


Net Income
















(725)


(38,650)Supplies Expense

(800)(750)

Rent Used(Accrual Actg.) = Cost per Month * Months Used $18,000 = $2,000 * 9

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LET’S GET THE FINAL RESULTS !!!!


Net Income




Change in Cash


Rent Expense ($24,000)Rent Expense ($18,000)









(725)Salary Expense ($36,250)

(38,650)



(750)

$ 3725

($16,700)

$20,500($11,200)

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Rent Expense ($24,000)Advertising Revenue $45,000


Supplies Expense (800) ($16,700)

Direct approach shows the individual

operating cash inflows and outflows

directly.

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Cash Flow StatementOperating ActivitiesNet Income $ 3,725Plus: Depreciation $2,250 Increase in S/P 2,400 Increase in A/P 50 Increase in Util/P 75Increase in Int/P 900 5,675Minus: 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 accrual-

basis earnings and cash-

basis earnings.

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Cash Flow StatementOperating ActivitiesNet Income $

3,725Plus: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 ($16,700)




for the differences

between accrual-


basis earnings.

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3,725Plus:2) Add net decreases

in current assets.

3) Add net increases in current liabilities.

Cash Flow from operations ($16,700)




for the differences

between accrual-


basis earnings.

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3,725Plus:Minus: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)




for the differences

between accrual-


basis earnings.

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Let’s Look at an

Example of Making

a Statement

of Cash Flows


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HRB Comparative Balance Sheets2001 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) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850

Putting together a Statement of Cash Flows

#1Calculate

Change in Balance Sheet

Accounts

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HRB Comparative Balance Sheets 2001 2002 Change


Less: A/D (2,250) (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850


#2Classify what part

of SCF the

Balance Sheet Items

relate to.Operatin

gFinancin

g or Investing

OP

OPOP

INV

OP (Dep. Exp) and/or INV(Asset Sales)

50

HRB Comparative Balance Sheets2001 2002

ChangeAssets Cash ($11,200) $ 500 Cash ($11,200) $ 500 + $ 11,700+ $ 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



Answer to:

Increase in

Cashfor the period

onStatemen

t

51

HRB Comparative Balance Sheets 2001 2002 Change


Less: A/D (2,250) (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850



of SCF the

Balance Sheet Items

relate to.Operatin

gFinancin

g or Investing

OP

OPOP

INV

OP (Dep. Exp) and/or INV(Asset Sales)

52

HRB Comparative Balance Sheets2001 2002

ChangeAssets 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


Putting together a Statement of Cash Flows #3

Analyze changes

and determine

Cash Flow effect

along with info from Income

Statement and other

data as needed

53

HRB Comparative Balance Sheets

2001 2002 Change

Balance Sheet A/R 20,000 15,775 -4225

Income St.


Analyze changes

and determine

Cash Flow effect


Statement and other

data as needed

A/R relates to what Income Statement item?

Revenues $92,000

RevenuesA/R

Beg. Bal $20,000

End. Bal $15,775

$92,000

????Credit Sales

????

Cash Collections$92,00096,225

Operating activity

Now, let’s see how it looks on the SCF!

Cash Cash Effect!!Effect!!

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2001 2002 Change

Balance Sheet A/R 20,000 15,775 - 4225

Cash Collections $96,225

Income St. Revenues $92,000

Net Income ($1,725)

Operating activity

SCFDirect Method

Operating Activities

SCFIndirect MethodOperating ActivitiesNet Income ($1,725)Plus:

Cash Revenues $96,225

Decrease in A/R 4225

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2001 2002 Change

Balance Sheet A/R 20,000 15,775 - 4225

Cash Collections $96,225

Income St. Revenues $92,000

Net Income ($1,725)

Operating activity

SCFDirect Method



Cash Revenues $96,225

Decrease in A/R 4225

Revenues $ 92,000-Expenses (93,725) Net Loss ($1,725)

Revenues $92,000+ dec. in A/R 4,225 Cash Revenues$96,225It’s there but it’s hidden!It’s there but it’s hidden!

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????????

End. Bal $75

Purchases on Account


Balance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125

A/P (Supplies) 50 75 + 25

Income St.


Supplies relates to what Income Statement item?

Supplies Exp. $1,200

Supplies Exp.

Supplies Inv.

Beg. Bal $100

End. Bal $225

$1,200

????

????

Supplies Used

$1,2001,325

Operating activity

Beg. Bal $501,3251,300

Supplies

Paid

A/P (Supplies)


Pur on Acc

57

SCFDirect Method



Minus:

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125A/P (Supplies) 50 75 + 25Cash Paid (Supplies) 1,300Income St. Supplies Exp.$1,200


Operating activity

Supplies ($1,300)

Increase in Supplies (125)

Increase in A/P Sup. 25

58

SCFDirect Method



Minus:

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125A/P (Supplies) 50 75 + 25Cash Paid (Supplies) 1,300Income St. Supplies Exp.$1,200


Operating activity

Supplies ($1,300)

Increase in Supplies (125)

Increase in A/P Sup. 25


Supplies Exp. ($1,200)+ inc. in Sup. (125)- dec.in A/P 25Cash Supplies ($1,300)It’s there but it’s hidden!It’s there but it’s hidden!

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????Rent Paid in Advance this yr.


Balance Sheet 2001 2002 ChangePrepaid Rent 6,000 6,000 + 0Income St.


Rent relates to what Income Statement item?

Rent Exp. $24,000

Rent Exp.Prepaid Rent

Beg. Bal $6,000

End. Bal $6,000

$24,000

????

????

Rent Used 4/1-12/31

18,000

24,000

Operating activity

Rent Used 1/1-3/31

6,000Cash Cash Effect!!Effect!!

60

SCFDirect Method



Minus:

Rent ($24,000)Prepaid Rent +/- 0

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangePrepaid Rent 6,000 6,000 + 0Cash Paid Rent $24,000Income St. Rent Exp. $24,000



Rent Exp. ($24,000)+/- Prepaid Rent. 0Cash Rent ($24,000)Cash & Accrual are Cash & Accrual are

equal , no adj. equal , no adj. neededneeded

61

HRB Comparative Balance Sheets 2001 2002

ChangeLiabilities Utilities Payable $75 $ 50 - 25 Interest Payable 900 675 - 225 A/P (Supplies) 50 75 + 25 Salaries Payable 2,400 4,200 + 1,800 Bank Loan Payable 10,000 0 - 10,000 Note Payable 0 10,000 +10,000Total Liabilities$ 13,425 $15,000 + $ 1,575



of SCF the

Balance Sheet Items

relate to.Operatin

gFinancin

g or Investing

OP

FIN

OPOPOP

FIN

62


ChangeBalance Sheet Util/Pay 75 50 -

25Income St.


Analyze changes

and determine

Cash Flow effect


Statement and other

data as needed

Utilities relates to what Income Statement item?

Utilities Exp. $1,050

Utility Exp.Utility Pay.

$75 Beg. Bal

$50 End. Bal

$1,050

????UtilitiesPaid

????

Utilities Used$1,0751,050

Operating activity



63

SCFDirect Method


SCFIndirect MethodOperating ActivitiesNet Income ($1,725)

Minus:

Utilities ($1,075)

Decrease in Util/Pay (25)


ChangeBalance Sheet Util/Pay 75 50 -

25Utilities Paid 1,075Income St. Utilities Exp. $1,050


Operating activity


Utilities Exp. ($1,050)+decr.in Util/Pay (25)Cash Utilities ($1,075)It’s there but it’s hidden!It’s there but it’s hidden!

64

Interest Exp.


ChangeBalance Sheet Int/Pay 900 675 -

225Income St.


Analyze changes

and determine

Cash Flow effect


Statement and other

data as needed

Interest relates to what Income Statement item?

Interest Exp. $1,350

Interest Pay.

$900 Beg. Bal

$675 End. Bal

$1,350 ????Interest

Paid????

Interest Used$1,5751,350

Operating activity



65

SCFDirect Method


SCFIndirect MethodOperating ActivitiesNet Income ($1,725)Minus:

Interest ($1,575)

Decrease in Intl/Pay (225)



ChangeBalance Sheet Int/Pay 900 675 -

225Cash Interest Paid 1,575Income St. Interest Exp. $1,350


Int. Exp. ($1,350)+decr.in Int/Pay (225)Cash Interest ($1,575)It’s there but it’s hidden!It’s there but it’s hidden!

66


ChangeStockholders’ Equity Common Stock $10,500 $16,500 +

6,000 Retained Earnings 3,725 2,000 -

1,725 Total Stockholders’Equity $ 13,425 $15,000 + $

1,575



of SCF the

Balance Sheet Items

relate to.Operatin

gFinancin

g or Investing

FIN

FIN OP&

67


ChangeBalance Sheet Common Stock 10,500 16,500

+6,000Company issued a Common Stock for cash

$6,000.


Analyze changes

and determine

Cash Flow effect


Statement and other

data as needed

CashCommon Stk

Beg. Bal $ 10,500

End. Bal $ 16,500

$6,000 ????

Stock Retired ????Stock Issued $6,000

0

Financing activity



68

SCFDirect Method


SCFIndirect Method

Financiang Activities


Common Stock Issued $6,000

Common StockIssued $6,000


ChangeBalance Sheet Common Stock 10,500 16,500

+6,000Company issued a Common Stock for cash

$6,000.

Financing activity

HRB AdvertisingStatement of Cash Flows

2001 2002Operating 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) $7,200Investing 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 $6000Change in Cash ($11,200) $11,700Change 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.


2001 2002Operating 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) $7,200Investing 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 $6000Change in Cash ($11,200) $11,700Change in Cash ($11,200) $11,700

The statement


because it:

2. Shows the entity’s ability to

pay dividends and meet

obligations.

HRB Advertising

Statement of Cash Flows

2001 2002


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) $7,200Total Op. Cash Flow ($16,700) $7,200

The statement


because it:

3. Details differences between net income and

cash provided

by operations.


2001 2002Operating ActivitiesTotal Op. Cash Flow ($16,700)

$7,200Investing Activities Total Inv. Cash Flow ($15,000)

($1,500)Financing ActivitiesTotal Fin. Cash Flow $20,500

$6000Change in Cash ($11,200) Change in Cash ($11,200)

$11,700$11,700

Significant Non-Cash Investing & Financing

Activities

Exchanged Land $15,000 -- for Stock

Purchased Building -- $25,000

with Note Payable

The statement


because it:

4. Details cash and noncash

investing and

financing activities.

73

RoadmapRoadmap

Measurement conventions of Balance Sheet Items

Cash Flow Statement– Indirect approach– Direct approach

CHAPTER 4 Structure of the Balance Sheet and Statement of ...

Documents

motorola balance

balance sheet

balance sheet

equalthe reported

total stockholders

supplies inventory

current portion

total current