CHAPTER TWENTYFIVE STATEMENT OF CASH FLOWS STATEMENT OF

CHAPTER TWENTY-FIVE STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS § Purpose: To provide information about how cash was generated and used during the period § Divides cash related activities into three categories: o Operating Activities o Investing Activities o Financing Activities

OPERATING ACTIVITIES § Transactions and events associated with: • selling a product or providing a service • the revenues and expenses reported on the Income Statement § Represent the company’s primary source of cash over the life of the business INFLOW EXAMPLES Cash receipts from the sale of goods or services Interest received on loans made to outside entities Dividends received on investments made in the stock of other companies

OPERATING ACTIVITIES § Transactions and events associated with: • selling a product or providing a service • the revenues and expenses reported on the Income Statement § Represent the company’s primary source of cash over the life of the business OUTFLOW EXAMPLES Payments for the acquisition of inventory Payments to employees and the government Payments for interest on loans Payments to other suppliers and for other expenses

CASH FLOWS FROM OPERATING ACTIVITIES § TWO METHODS: o DIRECT • Revenues and expenses are adjusted – to reflect the amount of cash received or paid for each item o INDIRECT • Net income is adjusted – for transactions that affect net income, but have no effect on cash flows

INVESTING ACTIVITIES § Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principalon the related loans INFLOW EXAMPLES 4 Proceeds from: bcollection of principal on loans made bsale of property, plant and equipment; intangibles; and other productive assets bsale of investments in debt and equity securities bdiscounting notes receivable

INVESTING ACTIVITIES § Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principal on the related loans OUTFLOW EXAMPLES Loans made to other parties Payments to acquire property, plant, and equipment; intangibles; and other productive assets Payments to acquire investments in debt and equity securities

FINANCING ACTIVITIES § Transactions dealing with the exchange of cash between the company and its owners and creditors INFLOW EXAMPLES • Proceeds from additional investments by the owners or the issuance of stock • Proceeds from borrowing money through the signing of a mortgage, issuing a bond or other long- or short-term loans

FINANCING ACTIVITIES § Transactions dealing with the exchange of cash between the company and its owners and creditors OUTFLOW EXAMPLES • Payments of dividends to stockholders or withdrawals by the owners • Payments to purchase treasury stock • Repayment of the principal on loans

STATEMENT OF CASH FLOWS EXAMPLE: Simplex Company has prepared its Income Statement, Statement of Retained Earnings and Balance Sheet for 20 -3. Now it needs to prepare its Statement of Cash Flows.

Simplex Company Comparative Balance Sheet December 31, 20 -3 and 20 -2 20 -3 20 -2 Increase (Decrease) Assets Current Assets: Cash Accounts Receivable Merchandise Inventory Total current assets $ 90, 000 160, 000 180, 000 $430, 000 $ 200, 000 $(110, 000) 190, 000 (30, 000) 200, 000 (20, 000) $590, 000 (160, 000) The Statement of Cash Flows will explain how the cash account Property, Plant and Equipment: decreased by $110, 000 in 20 -3. Land $ 40, 000 Building Equipment Total property, plant and equip. Total assets 140, 000 100, 000 $ 280, 000 $ 710, 000 0 0 $ 40, 000 $ 630, 000 0 140, 000 100, 000 $240, 000 $ 80, 000

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions Sales $ 900, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 The revenues and expenses from the Income Statement are used in computing the “Cash Flow Generated from Operating Activities. ”

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions Sales $ 900, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 We’ll start with the Sales… Sales (revenues) are recognized when earned, regardless of the amount of cash actually received. Sales must be converted to the amount of “Cash Received from Customers. ”

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 To convert Sales into the “Cash Received from Customers” we need to examine the Accounts Receivable account.

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 Sales increases the Accounts Receivable account.

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 Sales ? Accounts Receivable is decreased by customers making payments.

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 Sales End. balance $160, 000 ? Accounts Receivable decreased by $30, 000 during 20 -3.

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 Sales ? End. balance $160, 000 When Accounts Receivable decreases… Cash rec’d from customers > Sales

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 $900, 000 ? End. balance $160, 000 Sales for the year were $900, 000…

CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE Beg. balance $190, 000 $900, 000 $930, 000 End. balance $160, 000 Cash Rec’d from Customers = Sales + Decrease in A/R $900, 000 + $30, 000

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Cash Received from Customers.

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Cost of Goods Sold is adjusted next….

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 We need to determine the amount of merchandise purchased during the year.

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 ? Purchases increase inventory.

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 ? Cost of Goods Sold Selling goods (merchandise) reduces inventory.

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 ? Cost of Goods Sold End. balance $180, 000 Inventory decreased by $20, 000 during 20 -3.

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 ? Cost of Goods Sold End. balance $180, 000 When inventory decreases during the year…. . Cost of Goods Sold > Purchases

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 ? $600, 000 End. balance $180, 000 Cost of Goods Sold for 20 -3 is $600, 000.

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 $580, 000 $600, 000 End. balance $180, 000 Purchases for 20 -3 = Cost of Goods Sold - decrease in Merch. Inventory $600, 000 - $20, 000

CASH PAID FOR MERCHANDISE INVENTORY Beg. balance $200, 000 $580, 000 $600, 000 End. balance $180, 000 Cost of merchandise purchased.

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 Cost of Goods Sold 600, 000 $(20, 000) Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Decrease in Merchandise Inventory

CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180, 000 Beg. balance $120, 000 End. balance Now that we know Simplex’ purchases, we need to determine how much cash was paid for these goods.

CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180, 000 Beg. balance ? $580, 000 $120, 000 End. balance Purchases increase Accounts Payable and cash payments on these purchases decrease Accts. Payable.

CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180, 000 Beg. balance ? $580, 000 $120, 000 End. balance Accounts Payable decrease by $60, 000 during 20 -3, Purchases < Cash paid

CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180, 000 Beg. balance $640, 000 $580, 000 $120, 000 End balance Cash paid for merchandise = Purchases + decrease in Accounts Payable $580, 000 + $60, 000

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 $60, 000 $(20, 000)$ 640, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Decrease in Accounts Payable

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 $60, 000 $(20, 000)$ 640, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Operating Expenses are generally adjusted for prepaid expenses, accrued liabilities, and depreciation.

Simplex Company Schedule for the Calculation of Cash Generated from Operating Activities For Year Ended December 31, 20 -3 Cash Flow Income Statement Additions Deductions $30, 000 Sales $ 900, 000 $ 930, 000 $60, 000 $(20, 000)$ 640, 000 Cost of Goods Sold 600, 000 Gross Profit $ 300, 000 Operating Expenses 220, 000 Net Income $ 80, 000 Simplex does not have any of these items , so there is no need to adjust operating expenses.

Simplex Company Statement of Cash Flows For Year ended December 31, 20 -3 Cash flows from operating activities: Cash received from customers Cash paid for merchandise $(640, 000) Cash paid for operating expenses (220, 000) Total cash disbursed for operating act. Net cash provided by operating activities Cash flows from investing activities: Now that the operating section is completed, we turn our attention to the investing section. $930, 000 (860, 000) $ 70, 000

Simplex Company Comparative Balance Sheet December 31, 20 -3 and 20 -2 20 -3 20 -2 Increase (Decrease) Assets Current Assets: Cash Accounts Receivable Merchandise Inventory Total current assets $ 90, 000 160, 000 180, 000 $430, 000 $ 200, 000 $(110, 000) 190, 000 (30, 000) 200, 000 (20, 000) $590, 000 (160, 000) Property, Plant and Equipment: Land $ 40, 000 0 Building 140, 000 0 140, 000 Equipment 100, 000 0 100, 000 Investing the purchase Total property, plantactivities and equip. involve $ 280, 000 $ 40, 000 $240, 000 and sale of Plant$ 710, 000 Assets. $ 630, 000 $ 80, 000 Total assets

INVESTING ACTIVITIES BUILDING Beg. balance $0 End balance $140, 000 EQUIPMENT Beg. balance $0 End balance $100, 000 Simplex Company informs us the only activity in the building and equipment accounts in 20 -3 was the purchase of a building and equipment for cash, just before year end.

Simplex Company Statement of Cash Flows For Year ended December 31, 20 -3 Cash flows from operating activities: Cash received from customers Cash paid for merchandise $(640, 000) Cash paid for operating expenses (220, 000) Total cash disbursed for operating act. Net cash provided by operating activities (860, 000) $ 70, 000 Cash flows from investing activities: Purchased building Purchased equipment Net cash used by investing activities (240, 000) $930, 000 $(140, 000) (100, 000) Cash flows from financing activities: On to the Financing section. . .

Simplex Company Comparative Balance Sheet December 31, 20 -3 and 20 -2 20 -3 20 -2 Increase (Decrease) Assets Current Assets: Cash Accounts Receivable Merchandise Inventory Total current assets $ 90, 000 160, 000 180, 000 $430, 000 $ 200, 000 $(110, 000) 190, 000 (30, 000) 200, 000 (20, 000) $590, 000 (160, 000) Financing activities involve exchanges of cash between the company and Property, Plant and Equipment: Land 40, 000 $ 40, 000 its stockholders and$ creditors. Building Equipment Total property, plant and equip. Total assets 140, 000 100, 000 $ 280, 000 $ 710, 000 0 0 $ 40, 000 $ 630, 000 0 140, 000 100, 000 $240, 000 $ 80, 000

Liabilities Current liabilities: Notes Payable Accounts Payable Total liabilities $ 60, 000 120, 000 $180, 000 $ 50, 000 $ 10, 000 180, 000 (60, 000) $230, 000 (50, 000) Let’s. Equity begin by analyzing Stockholders’ Common Stock $5 cash par, 100, 000 the related activities shares auth. ; Issued 58, 000 in the Notes Payable account. in 20 -3, 50, 000 in 20 -2 $290, 000 $250, 000 40, 000 Paid-in-capital in excess of parcommon stock 130, 000 100, 000 30, 000 Retained Earnings 110, 000 50, 000 60, 000 Total stockholders’ equity $ 530, 000 $ 400, 000 130, 000 Total liab. & stockholders’ equity $ 710, 000 $ 630, 000 $ 80, 000

FINANCING ACTIVITIES NOTES PAYABLE $ 50, 000 Beg. balance $10, 000 $ 60, 000 $10, 000 increase in 20 -3 from issuing a note.

Simplex Company Statement of Cash Flows For Year ended December 31, 20 -3 Cash flows from operating activities: Cash received from customers Cash paid for merchandise $(640, 000) Cash paid for operating expenses (220, 000) Total cash disbursed for operating act. Net cash provided by operating activities (860, 000) $ 70, 000 Cash flows from investing activities: Purchased building Purchased equipment Net cash used by investing activities (240, 000) Cash flows from financing activities: Issued Note Payable $930, 000 $(140, 000) (100, 000) $ 10, 000

Liabilities Current liabilities: Notes Payable Accounts Payable Total liabilities $ 60, 000 120, 000 $180, 000 $ 50, 000 $ 10, 000 180, 000 (60, 000) $230, 000 (50, 000) Stockholders’ Equity Common Stock $5 par, 100, 000 shares auth. ; Issued 58, 000 in 20 -3, 50, 000 in 20 -2 $290, 000 $250, 000 40, 000 Paid-in-capital in excess of parcommon stock 130, 000 100, 000 30, 000 Retained Earnings 110, 000 50, 000 60, 000 Total stockholders’ equity $ 530, 000 $ 400, 000 130, 000 We will move now to Total liab. & stockholders’ equity $ 710, 000 $ 630, 000 $ 80, 000 the Capital Stock accounts.

INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PARCOMMON STOCK $250, 000 Beg. balance $ 100, 000 Beg. balance $290, 000 End balance The only types of transactions that increase or decrease the Capital Stock accounts are issuing and retiring stock. $130, 000 End balance

INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PARCOMMON STOCK $250, 000 Beg. balance $ 100, 000 Beg. balance $40, 000 $290, 000 End balance $130, 000 End balance Since Common Stock increased during 20 -3, stock with par value of $40, 000 was issued.

INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PARCOMMON STOCK $250, 000 Beg. balance $ 100, 000 Beg. balance $40, 000 $30, 000 $290, 000 End balance $130, 000 End balance Since Paid-In Capital increased during 20 -3, stock was issued for a price $30, 000 above the par value.

Simplex Company Statement of Cash Flows For Year ended December 31, 20 -3 Cash flows from operating activities: Cash received from customers Cash paid for merchandise $(640, 000) Cash paid for operating expenses (220, 000) Total cash disbursed for operating act. Net cash provided by operating activities (860, 000) $ 70, 000 Cash flows from investing activities: Purchased building Purchased equipment Net cash used by investing activities (240, 000) Cash flows from financing activities: Issued Note Payable Issued Common Stock $930, 000 $(140, 000) (100, 000) $ 10, 000 70, 000

Liabilities Current liabilities: Notes Payable Accounts Payable Total liabilities $ 60, 000 120, 000 $180, 000 $ 50, 000 $ 10, 000 180, 000 (60, 000) $230, 000 (50, 000) Stockholders’ Equity Common Stock $5 par, 100, 000 shares auth. ; Issued 58, 000 in 20 -3, 50, 000 in 20 -2 $290, 000 $250, 000 40, 000 Paid-in-capital in excess of parcommon stock 130, 000 100, 000 30, 000 Retained Earnings 110, 000 50, 000 60, 000 Total stockholders’ equity $ 530, 000 $ 400, 000 130, 000 Total liab. & stockholders’ equity $ 710, 000 The final account to be $ 630, 000 $ 80, 000 analyzed is Retained Earnings.

Simplex Company Statement of Retained Earnings For Year ended December 31, 20 -3 Retained Earnings, January 1, 20 -3 Net Income $ 80, 000 Less dividends 20, 000 Net increase in retained earnings Retained Earnings, December 31, 20 -3 The Statement of Retained Earnings provides us with a summary of all the activity in the account. $ 50, 000 60, 000 $110, 000

Simplex Company Statement of Retained Earnings For Year ended December 31, 20 -3 Retained Earnings, January 1, 20 -3 Net Income $ 80, 000 Less dividends 20, 000 Net increase in retained earnings Retained Earnings, December 31, 20 -3 The Net Income has already been analyzed for cash activities…. But dividends involve the payment of cash and therefore must be recorded on the Statement of Cash Flows. $ 50, 000 60, 000 $110, 000

Cash flows from financing activities: Issued Note Payable Issued Common Stock Paid cash dividends Net cash provided by financing activities Net increase in cash Operating Investing Financing $ 10, 000 70, 000 (20, 000) $ 70, 000 (240, 000) 60, 000 $(110, 000)

Cash flows from financing activities: Issued Note Payable Issued Common Stock Paid cash dividends Net cash provided by financing activities Net increase in cash Cash balance, January 1, 20 -3 Cash balance, December 31, 20 -3 $ 10, 000 70, 000 (70, 000) What about more complex companies? 60, 000 $(110, 000) 200, 000 $ 90, 000

Multiplex Company Comparative Balance Sheet December 31, 20 -2 and 20 -1 20 -2 20 -1 Increase (Decrease) Assets Current Assets: Cash $ 22, 980 $ 20, 000 $ 2, 980 Government notes 1, 800 3, 200 (1, 400) Accrued interest receivable 100 300 (200) 8, 705 Accounts Receivable (net) 60, 215 51, 510 Merchandise inventory 64, 570 67, 500 (2, 930) 2, 750 1, 250 Supplies and prepayments Step #1 4, 000 Total current assets $153, 665 8, 405 Compute the change in $145, 260 Property, plant andcash equipment and cash equivalents. Store equipment $ 48, 000 $ 38, 800 9, 200 Less accumulated depreciation (18, 000) (14, 000) 4, 000 Delivery equipment $ 45, 000 $ 32, 000 13, 000 (12, 500) ( 8, 000) 4, 500 Less accumulated depreciation

CASH AND CASH EQUIVALENTS §To qualify as a cash equivalent: • an investment must be readily convertible to a known amount of cash §These are considered the same as cash when preparing the statement of cash flows 20 -1 $20, 000 3, 200 $23, 200 20 -2 Cash Gov’t Notes $1, 580 increase $22, 980 1, 800 $24, 780

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income Additions Deductions $ 45, 250 155 650 $ 44, 755 Step #2 Prepare a schedule to calculate cash from operating activities. Cash Flow

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 Increase in Accounts Receivable

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 (2, 930) Decrease in Inventory…. purchased less than what was sold

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 $11, 400 (2, 930) Decrease in Accounts Payable. . . paid for more than what was purchased

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 $11, 400 (2, 930) 278, 570 $ 172, 825 Operating expenses involve many accounts.

OPERATING EXPENSES SUPPLIES AND PREPAYMENTS Beg. Balance $2, 750 End Balance $4, 000 Supplies purchased and prepayments made

OPERATING EXPENSES SUPPLIES AND PREPAYMENTS Beg. Balance $2, 750 End Balance $4, 000 Supplies and prepayments consumed (Operating Expenses)

OPERATING EXPENSES SUPPLIES AND PREPAYMENTS Beg. Balance $2, 750 End Balance $4, 000 $1, 250 Increase indicates more were purchased (paid) than were consumed (expensed).

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 $11, 400 (2, 930) 278, 570 $ 172, 825 1, 250

OPERATING EXPENSES Multiplex informs us that Depreciation Expense of $10, 400 is included in the Operating Expenses reported on the Income Statement. Depreciation does not use or provide cash… therefore it should be subtracted from Operating Expenses on our schedule.

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Cash Flow Additions Deductions $(8, 705) $ 451, 395 $11, 400 (2, 930) 278, 570 $ 172, 825 1, 250 (10, 400)

OPERATING EXPENSES ACCRUED AND WITHHELD PAYROLL TAXES $1, 520 Beg. Balance $ 950 End Balance The $570 decrease indicates more was paid than expensed.

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Additions $11, 400 1, 250 570 Cash Flow Deductions $(8, 705) $ 451, 395 (2, 930) 278, 570 $ 172, 825 (10, 400) 136, 170 $ 36, 655 Let’s analyze the Interest Revenue account.

INTEREST REVENUE INTEREST RECEIVABLE Beg. Balance $300 End Balance $ 100 The $200 decrease indicates more was received than earned this period.

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Additions $11, 400 1, 250 570 200 Cash Flow Deductions $(8, 705) $ 451, 395 (2, 930) 278, 570 $ 172, 825 (10, 400) 136, 170 $ 36, 655 355 Interest Expense is the final account to be analyzed.

INTEREST EXPENSE INTEREST PAYABLE $ 80 Beg. Balance $ 100 End Balance The increase indicates all but $20 of this year’s Interest Expense was paid.

Multiplex Company Income Statement For Year Ended December 31, 20 -2 Income Statement Net Sales $ 460, 000 Cost of Goods Sold 270, 100 Gross Profit $ 190, 000 Operating Expenses 144, 750 Operating Income Interest revenue Interest expense Net Income $ 45, 250 155 650 $ 44, 755 Additions $11, 400 1, 250 570 200 Cash Flow Deductions $(8, 705) $ 451, 395 (2, 930) 278, 570 $ 172, 825 (10, 400) 136, 170 $ 36, 655 355 (20) 630 $ 36, 380

Multiplex Corporation Statement of Cash Flows For Year ended December 31, 20 -2 Cash flows from operating activities: Cash received from customers $451, 395 Cash paid for merchandise 355 Cash provided by operating activities Cash paid for merchandise $(278, 570) Cash paid for operating expenses (136, 170) Interest paid (630) Total cash disbursed for oper. activities Net cash provided bv operating activities Cash flows from investing activities: $451, 750 (415, 370) $ 36, 380

INVESTING ACTIVITIES STORE EQUIPMENT Bal. $ 38, 800 Bal. $ 48, 000 OFFICE EQUIPMENT Bal. $ 34, 000 Bal. $ 38, 000 Multiplex informs us the only equipment transactions were the purchases of new equipment for cash.

INVESTING ACTIVITIES STORE EQUIPMENT Bal. $ 38, 800 OFFICE EQUIPMENT Bal. $ 34, 000 9, 200 4, 000 Bal. $ 48, 000 Bal. $ 38, 000 Cash paid for equipment

Multiplex Corporation Statement of Cash Flows For Year ended December 31, 20 -2 Cash flows from operating activities: Cash received from customers $451, 395 Cash paid for merchandise 355 Cash provided by operating activities Cash paid for merchandise $(278, 570) Cash paid for operating expenses (136, 170) Interest paid (630) Total cash disbursed for oper. activities Net cash provided bv operating activities Cash flows from investing activities: $ (9, 200) Purchased store equipment Purchased office equipment (4, 000) $451, 750 (415, 370) $ 36, 380

INVESTING ACTIVITIES DELIVERY EQUIPMENT Beg. Balance $ 32, 000 13, 000 End Balance $ 45, 000 Purchase of new equipment in exchange for a note.

INVESTING ACTIVITIES DELIVERY EQUIPMENT Beg. Balance $ 32, 000 13, 000 End Balance $ 45, 000 Since this transaction does not involve cash, it will not be shown on the Statement of Cash Flows.

Multiplex Corporation Statement of Cash Flows For Year ended December 31, 20 -2 Cash flows from operating activities: Cash received from customers $451, 395 Cash paid for merchandise 355 Cash provided by operating activities Cash paid for merchandise $(278, 570) Cash paid for operating expenses (136, 170) Interest paid (630) Total cash disbursed for oper. activities Net cash provided bv operating activities Cash flows from investing activities: $ (9, 200) Purchased store equipment Purchased office equipment (4, 000) Net cash used bv investing activities Cash flows from financing activities: $451, 750 (415, 370) $ 36, 380 (13, 200)

FINANCING ACTIVITIES COMMON STOCK $ 98, 000 Bal. PAID-IN CAPITAL $ 39, 000 Bal. 2, 000 $ 100, 000 Bal. Multiplex issued additional shares of stock for $3, 000. 1, 000 $ 40, 000 Bal.

Multiplex Corporation Statement of Cash Flows For Year ended December 31, 20 -2 Cash flows from operating activities: Cash received from customers $451, 395 Cash paid for merchandise 355 Cash provided by operating activities Cash paid for merchandise $(278, 570) Cash paid for operating expenses (136, 170) Interest paid (630) Total cash disbursed for oper. activities Net cash provided bv operating Multiplex informs us activities Cash flows from investing activities: that cash dividends $ (9, 200) Purchased equipment ofstore $22, 800 were paid Purchased officein equipment (4, 000) 20 -2. Net cash used bv investing activities Cash flows from financing activities: Issued common stock $ 3, 000 $451, 750 (415, 370) $ 36, 380 (13, 200)

Cash flows from financing activities: Issued Common Stock Paid cash dividends $ 3, 000 (22, 800)

INVESTING ACTIVITIES NOTES PAYABLE $ 11, 800 Beg. Balance 1, 800 Cash was paid to reduce the Notes Payable balance. $ 10, 000 End. Balance

Cash flows from financing activities: Issued Common Stock Paid cash dividends Retired note payable Net cash used bv financing activities Net increase in cash and cash equivalents Cash and cash equivalents, January 1, 20 -2 Cash and cash equivalents, December 31, 20 -2 $ 3, 000 (22, 800) (1, 800) Schedule of noncash investing and financing activities: Non-cash investing and financing activities are activities that involve no cash flow, but represent a significant change in the company’s financial position. (21, 600) $ 1, 580 23, 200 $24, 780

Cash flows from financing activities: Issued Common Stock Paid cash dividends Retired note payable Net cash used bv financing activities Net increase in cash and cash equivalents Cash and cash equivalents, January 1, 20 -2 Cash and cash equivalents, December 31, 20 -2 $ 3, 000 (22, 800) (1, 800) (21, 600) $ 1, 580 23, 200 $24, 780 Schedule of noncash investing and financing activities: Acquired delivery equip. by issuing a note Multiplex had one such transaction… The issuance of a note payable to purchase new Delivery Equipment.

INTERPRETING THE STATEMENT § Most important indicator of financial health of a business is “Net cash used or provided by operating activities” o Positive cash flows are needed to purchase property, plant and equipment. • This could be done through borrowing but loans must be repaid. • This could be done through issuance of stock but dividends have to be paid. o Chronic inability to generate positive cash flows is a sure sign of financial instability.