“How Well Am I Doing?

”
Statement of Cash Flows

PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
13-2

Purpose of the Statement of Cash Flows

Are cash flows Why is there a
sufficient to difference
support ongoing between net
Can we meet income and net
operations?
our obligations cash flow?
to creditors?

Will the company

have to borrow Can we pay
money to make dividends?
needed
investments?
13-3

Learning Objective 1

Classify changes in noncash

balance sheet accounts as
sources or uses of cash.
13-4

Definition of Cash
The term cash on the statement of cash flows refers
broadly to both currency and cash equivalents.

Currency and
Bank Accounts
Treasury
Bills

Cash
Money Market Commercial
Funds Paper
13-5

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts

4. Changes in 3. Changes in
Capital Stock Liabilities

Net Cash
Flows for a
5. Dividends Period 2. Changes in
Paid to Noncash
Stockholders Assets

1. Net Income
13-6

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts
13-7

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts
Increases in noncash asset
accounts imply uses of cash.

Example: Inventory is
purchased on credit from
a supplier.

It is implied that cash

was used to acquire the
inventory.
13-8

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts
Increases in liability accounts imply
sources of cash.
Example: Inventory is
purchased on credit from
a supplier.

It is implied that an increase

in a payable has the effect
of increasing cash available
for other uses.
13-9

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts

Decreases in noncash assets

accounts imply sources of cash.

Example: Accounts receivable

decreases when a company
pays its bill.

The company’s cash

increases accordingly.
13-10

Constructing the Statement of Cash Flows Using

Changes in Noncash Balance Sheet Accounts

Decreases in liability accounts

imply uses of cash.
Example: If a company
makes a payment on a
note payable.

The company’s cash balance

decreases accordingly.
13-11

A Simplified Statement of Cash Flows

Ed's Pizza Hut
Comparative Balance Sheet Account Balances

3/31/2009 3/31/2008 Change

DR (CR) DR (CR) Incr. (Decr.)
Cash $ 71,000 $ 90,000 $ (19,000)
Accounts Receivable 23,000 40,000 (17,000)
Inventory 322,000 300,000 22,000
Land 68,000 100,000 (32,000)
Equipment 112,000 84,000 28,000
Accumulated Depr. (45,000) (39,000) 6,000
Accounts Payable (38,000) (27,000) 11,000
Salaries Payable (9,000) (14,000) (5,000)
Note Payable - Joe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
Retained Earnings (4,000) (34,000) (30,000)
$ - $ -
13-12

A Simplified Statement of Cash Flows

Additional
Additional Information:
Information:
 There
There was
was aa net
net loss
loss for
for the
the year
year of
of $27,000.
$27,000.
 Depreciation
Depreciation charges
charges for for the
the year
year were
were $6,000.
$6,000.
 During
During the
the year,
year, EdEd sold
sold land
land originally
originally costing
costing
$32,000
$32,000 for
for $32,000.
$32,000.
 During
During the
the year,
year, EdEd purchased
purchased equipment
equipment for for
$28,000.
$28,000.
 During
During the
the year,
year, EdEd paid
paid dividends
dividends of of $3,000
$3,000 to to the
the
stockholders.
stockholders.
 Ed
Ed issued
issued $50,000
$50,000 of of common
common stock
stock toto settle
settle the
the
note
note due
due to
to Joe
Joe Doe.
Doe.
13-13

A Simplified Statement of Cash Flows

Here is a summary of the sources
of cash for Ed’s Pizza Hut.
Ed's Pizza Hut
Sources of Cash
Decrease in A/R $ 17,000
Decrease in Land 32,000
Increase in A/P 11,000
Depreciation charges 6,000
Total sources of cash $ 66,000
13-14

A Simplified Statement of Cash Flows

Here is a summary of the uses of cash.

Ed's Pizza Hut
Uses of Cash
Net loss $ 27,000
Increase in Inventory 22,000
Increase in Equipment 28,000
Increase in Salaries Payable 5,000
Dividends paid 3,000
Total uses of cash $ 85,000

The net cash flow for Ed’s Pizza Hut is ($19,000):

$66,000 in sources minus $85,000 in uses.
13-15

A Simplified Statement of Cash Flows

Ed's Pizza Hut
Sources of Cash
Decrease in A/R $ 17,000
Decrease in Land 32,000 This simplified
Increase in A/P 11,000 approach does not
Depreciation charges 6,000
Total sources of cash $ 66,000 follow the format
required for
Ed's Pizza Hut
Uses of Cash external reporting
Net loss
Increase in Inventory
$ 27,000
22,000
purposes. It is for
Increase in Equipment 28,000 illustrative
Increase in Salaries Payable 5,000
Dividends paid 3,000
purposes only.
Total uses of cash $ 85,000
13-16

Learning Objective 2

Classify transactions as
operating, investing, or
financing activities.
13-17

The Three Sections of the Statement of Cash Flows

Operating activities are

those activities that enter
into the determination of
net income.
3.
3. Changes
Changes in in
noncurrent
noncurrent
1.
1. Transactions
Transactions balance
balance sheet
sheet
affecting
affecting current
current accounts
accounts that
that
assets
assets directly
directly affect
affect net
net
2.
2. Transactions
Transactions income
income
affecting
affecting current
current
liabilities
liabilities
13-18

The Three Sections of the Statement of Cash Flows

Investing activities relate to

transactions involving the
acquiring or disposing of
noncurrent assets.

1. Acquiring or 3. Lending money to

selling property, another entity and
plant and subsequently
equipment collecting on the loan
2. Acquiring or
selling securities
held for long-term
investments
13-19

The Three Sections of the Statement of Cash Flows

Financing activities relate to

transactions involving borrowing
from creditors or repaying creditors
and engaging in transactions with the
company’s owners.

3. Payment of
dividends (note
1. Issuing stock
that interest on
and purchasing
debt is classified
treasury stock
as an operating
2. Issuing long- activity)
term debt and
repayment of debt
13-20

Format of the Statement of Cash Flows

(Indirect Method)
Operating Activities:
Net income
Changes in current assets
Changes in noncurrent assets that affect net income (e.g., depreciation)
Changes in current liabilities (except for debts to lenders and dividends
payable)
Changes in noncurrent liabilities that affect net income
Investing Activities:
Changes in noncurrent assets that are not included in net income
Financing Activities:
Changes in the current liabilities that are debts to lenders rather than
obligations to suppliers, employees, or the government
Changes in noncurrent liabilities that are not included in net income
Changes in capital stock accounts
Dividends
13-21

Format of the Statement of Cash Flows

(Indirect Method)

Operating Activities
Reconciliation of the
Investing Activities beginning cash balance
with the ending cash
balance
Financing Activities Noncash Investing
and Financing
Activities
13-22

Operating Activities
Net Income or Loss $ XXX
Add: Decrease in current noncash assets XXX
Increase in current liabilities XXX
Depreciation charges XXX
Losses XXX
Less: Increase in current noncash assets (XXX)
Decrease in current liabilities (XXX)
Gains (XXX)
Cash Flows from Operating Activities $ XXX

Includes those activities that affect current

assets, current liabilities, or net income.
13-23

Operating Activities
Sources of cash are added to and
uses of cash are subtracted from net
cash provided by operating
activities.
13-24

Operating Activities
Net Income or Loss $ XXX
Add: Decrease in current noncash assets XXX
Increase in current liabilities XXX
Depreciation charges XXX
Losses XXX
Less: Increase in current noncash assets (XXX)
Decrease in current liabilities (XXX)
Gains (XXX)
Cash Flows from Operating Activities $ XXX
13-25

Operating Activities
Net Income or Loss $ XXX
Add: Decrease in current noncash assets XXX
Increase in current liabilities XXX
Depreciation charges XXX
Losses XXX
Less: Increase in current noncash assets (XXX)
Decrease in current liabilities (XXX)
Gains (XXX)
Cash Flows from Operating Activities $ XXX
13-26

Operating Activities
Net Income or Loss $ XXX
Add: Decrease in current noncash assets XXX
Increase in current liabilities XXX
Depreciation charges XXX
Losses XXX
Less: Increase in current noncash assets (XXX)
Decrease in current liabilities (XXX)
Gains (XXX)
Cash Flows from Operating Activities $ XXX
Depreciation and Amortization charges are added
back because they are decreases in noncash assets.
13-27

Operating Activities
Net Income or Loss $ XXX
Add: Decrease in current noncash assets XXX
Increase in current liabilities XXX
Depreciation charges XXX
Losses XXX
Less: Increase in current noncash assets (XXX)
Decrease in current liabilities (XXX)
Gains (XXX)
Cash Flows from Operating Activities $ XXX

Gains
Gainsare
are Losses
Lossesare
areadded.
added.
subtracted.
subtracted.
13-28

Investing Activities
Add:
Add: Proceeds
Proceedsfromfrom sale
sale of
ofland,
land,
buildings,
buildings, equipment,
equipment, or or other
other
noncurrent
noncurrentassets
assets $$ XXX
XXX
Receipt
Receiptof ofprincipal
principal from
from
investments
investments XXX
XXX
Less:
Less: Payments
Paymentsto to acquire
acquire land,
land,
buildings,
buildings, equipment,
equipment, or or other
other
noncurrent
noncurrentassets
assets (XXX)
(XXX)
Payments
Paymentsto to acquire
acquire
investments
investments (XXX)
(XXX)
Net
NetCash
Cash Flows
Flowsfrom
from Investing
Investing Activities
Activities $$ XXX
XXX

Includes
Includes transactions
transactions that
that involve
involve the
the
acquisition
acquisition or
or disposal
disposal of
of noncurrent
noncurrent assets.
assets.
13-29

Financing Activities
Add:
Add: Proceeds
Proceedsfrom
from borrowings
borrowings $$ XXX
XXX
Proceeds
Proceedsfrom
from issuing
issuing capital
capital
stock
stock XXX
XXX
Proceeds
Proceedsfrom
from sale
sale of
ofbonds
bonds XXX
XXX
Less:
Less: Principal
Principal payments
paymentson on
borrowed
borrowed funds
funds (XXX)
(XXX)
Payments
Paymentsrelated
related to
to bond
bond
maturities
maturities (XXX)
(XXX)
Dividend
Dividend payments
payments (XXX)
(XXX)
Net
NetCash
Cash Flows
Flowsfrom
from Financing
Financing Activities
Activities $$ XXX
XXX

Includes transactions involving receipts

from or payments to creditors and owners.
13-30

Cash Flows: Gross or Net?

For investing and Example:
• Assume Macy’s
financing activities, purchases $50 million
items on the in property during the
year and sells other
statement of cash property for $30
flows should be million.
• Instead of showing the
presented in gross net change of $20
amounts rather million, the company
must report the gross
than in net amounts of both
amounts. transactions.
13-31

Operating Activities: Direct or Indirect Method?

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the Starts with accrual

cash effects of net income and
each operating adjusts it to the
activity cash basis

No matter which format is used, the same amount of net

cash provided by operating activities is generated.
13-32

Learning Objective 3

Prepare a statement of cash

flows using the indirect method
to determine the net cash
provided by operating activities.
13-33

Statement of Cash Flows: Indirect Method

Ed's Pizza Hut
Comparative Balance Sheet Account Balances

3/31/2009 3/31/2008 Change

DR (CR) DR (CR) Incr. (Decr.)
Cash $ 71,000 $ 90,000 $ (19,000)
Accounts Receivable 23,000 40,000 (17,000) Let’s revisit the
Inventory 322,000 300,000 22,000 comparative
Land 68,000 100,000 (32,000)
balance sheet
Equipment 112,000 84,000 28,000
Accumulated Depr. (45,000) (39,000) 6,000 account balances
Accounts Payable (38,000) (27,000) 11,000 for Ed’s Pizza Hut.
Salaries Payable (9,000) (14,000) (5,000)
Note Payable - Joe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
Retained Earnings (4,000) (34,000) (30,000)
$ - $ -
13-34

Statement of Cash Flows: Indirect Method

Refresh your memory regarding the
following additional information.
 There
There was
was aa net
net loss
loss for
for the
the year
year of
of $27,000.
$27,000.
 Depreciation
Depreciation charges
charges forfor the
the year
year were
were $6,000.
$6,000.
 During
During the
the year,
year, Ed
Ed sold
sold land
land originally
originally costing
costing
$32,000
$32,000 for
for $32,000.
$32,000.
 During
During the
the year,
year, Ed
Ed purchased
purchased equipment
equipment for for
$28,000.
$28,000.
 During
During the
the year,
year, Ed
Ed paid
paid dividends
dividends ofof $3,000
$3,000 toto
the
the stockholders.
stockholders.
 Ed
Ed issued
issued $50,000
$50,000 of of common
common stockstock to
to settle
settle the
the
note
note due
due to
to Joe
Joe Doe.
Doe.
13-35

Step 1 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable
Inventory
Noncurrent assets
Land
List each account
Equipment appearing on the
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets comparative balance
Accumulated depreciation
Current liabilities sheets except for cash
Accounts payable
Salaries payable
and cash equivalents
Noncurrent liabilities and retained earnings.
Notes payable
Stockholders' equity
Common stock
Retained earnings
Net loss
Dividends
Total (net cash flow)
13-36

Step 2 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable $ (17,000)
Inventory 22,000
Noncurrent assets
Land (32,000)
Equipment 28,000
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
Accumulated depreciation 6,000
Current liabilities Compute the change
Accounts payable 11,000
Salaries payable (5,000) from the beginning
Noncurrent liabilities
Notes payable (50,000) balance to the ending
Stockholders' equity
Common stock 50,000
balance for each
Retained earnings account.
Net loss (27,000)
Dividends 3,000
Total (net cash flow)
13-37

Step 3 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable $ (17,000) Source
Inventory 22,000 Use
Noncurrent assets Code each entry on
Land
Equipment
(32,000) Source
28,000 Use
the worksheet as a
Contra Assets, Liabilities, and Stockholders' Equity source or use of
Contra assets
Accumulated depreciation 6,000 Source cash.
Current liabilities
Accounts payable 11,000 Source
Salaries payable (5,000) Use

{
Noncurrent liabilities
Notes payable (50,000) Use Recall that the transaction
Stockholders' equity involving the Notes Payable and
Common stock 50,000 Source
Common Stock was noncash.
Retained earnings
Net loss (27,000) Use
Dividends 3,000 Use
Total (net cash flow)
13-38

Step 4 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable $ (17,000) Source $ 17,000
Inventory 22,000 Use (22,000)
Noncurrent assets
Land (32,000) Source 32,000 Code sources
Equipment 28,000 Use (28,000)
Contra Assets, Liabilities, and Stockholders' Equity of cash as
Contra assets
Accumulated depreciation 6,000 Source 6,000 positive
Current liabilities
Accounts payable 11,000 Source 11,000
numbers and
Salaries payable (5,000) Use (5,000) uses of cash
Noncurrent liabilities
Notes payable (50,000) Use (50,000) as negative
Stockholders' equity
Common stock 50,000 Source 50,000
numbers.
Retained earnings
Net loss (27,000) Use (27,000)
Dividends 3,000 Use (3,000)
Total (net cash flow) $ (19,000)
13-39

Step 5 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet Make any
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect necessary
cation
Assets (except cash and cash equivalents)
Current assets
adjustments,
Accounts receivable $ (17,000) Source $ 17,000 - $ including
17,000
Inventory 22,000 Use (22,000) - (22,000)
Noncurrent assets adjustments
Land
Equipment
(32,000) Source
28,000 Use
32,000
(28,000)
-
-
for gains and
32,000
(28,000)
Contra Assets, Liabilities, and Stockholders' Equity losses. The
Contra assets
Accumulated depreciation 6,000 Source 6,000 - net effect of
6,000
Current liabilities
Accounts payable 11,000 Source 11,000 - these should
11,000
Salaries payable
Noncurrent liabilities
(5,000) Use (5,000) -
equal zero.
(5,000)

{
Notes payable (50,000) Use (50,000) 50,000
We -need to make an adjustment
Stockholders' equity
Common stock 50,000 Source 50,000 (50,000)
for-
the noncash transaction
Retained earnings relating to Notes Payable and
Net loss (27,000) Use (27,000) - (27,000) Common Stock.
Dividends 3,000 Use (3,000) - (3,000)
Total (net cash flow) $ (19,000) $ - $ (19,000)
13-40

Step 6 of 8
Ed's Pizza Hut
Statement of Cash Flows Worksheet
Source Cash Flow Adjust- Adjusted Classifi-
Change or Use? Effect ments Effect cation
Assets (except cash and cash equivalents)
Current assets
Accounts receivable $ (17,000) Source $ 17,000 - $ 17,000 Operating
Inventory 22,000 Use (22,000) - (22,000) Operating
Noncurrent assets Classify
Land
Equipment
(32,000) Source
28,000 Use
32,000
(28,000)
-
-
32,000
(28,000)
Investing
Investing
each
Contra Assets, Liabilities, and Stockholders' Equity
Contra assets
entry as
Accumulated depreciation 6,000 Source 6,000 - 6,000 Operating operating,
Current liabilities
Accounts payable 11,000 Source 11,000 - 11,000 Operating investing,
Salaries payable
Noncurrent liabilities
(5,000) Use (5,000) - (5,000) Operating
or
Notes payable (50,000) Use (50,000) 50,000 - financing
Stockholders' equity
Common stock 50,000 Source 50,000 (50,000) - activity.
Retained earnings
Net loss (27,000) Use (27,000) - (27,000) Operating
Dividends 3,000 Use (3,000) - (3,000) Financing
Total (net cash flow) $ (19,000) $ - $ (19,000)
13-41

Step 7 of 8
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss $ (27,000)
Add: Decrease in A/R 17,000
Increase in A/P 11,000 Copy the data
Increase in Depr. Charges 6,000 from the
Less: Increase in Inventory (22,000) worksheet into
Decrease in Salaries Payable (5,000)
Net Cash Provided by Operating Activities (20,000) the Statement of
Investing Activities Cash Flows
Proceeds from sale of Land 32,000 section by
Purchase of equipment (28,000) section.
Net Cash Provided by Investing Activities 4,000
Financing Activities
Dividends paid (3,000)
Net change in cash $ (19,000)
13-42

Step 8 of 8
Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities
Net Loss $ (27,000)
Add: Decrease in A/R 17,000
Increase in A/P 11,000
Increase in Depr. Charges 6,000 Prepare a cash
Less: Increase in Inventory (22,000) reconciliation at
Decrease in Salaries Payable (5,000)
Net Cash Provided by Operating Activities (20,000)
the bottom of the
Investing Activities statement.
Proceeds from sale of Land 32,000
Purchase of equipment (28,000)
Net Cash Provided by Investing Activities 4,000
Financing Activities
Dividends paid (3,000)
Net change in cash (19,000)
Cash, beginning 90,000
Cash, ending $ 71,000
13-43

Statement of Cash Flows: Indirect Method

Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
In addition, on the
Operating Activities
Net Loss $ (27,000) face of the
Add: Decrease in A/R 17,000 statement or in a
Increase in A/P 11,000
Increase in Depr. Charges 6,000
supplemental
Less: Increase in Inventory (22,000) schedule, disclose
Decrease in Salaries Payable (5,000) the issuance of
Net Cash Provided by Operating Activities (20,000)
Investing Activities $50,000 of stock
Proceeds from sale of Land 32,000 to a creditor, a
Purchase of equipment (28,000)
noncash financing
Net Cash Provided by Investing Activities 4,000
Financing Activities activity.
Dividends paid (3,000)
Net change in cash (19,000)
Cash, beginning 90,000
Cash, ending $71,000
13-44

Interpretation of the Statement of Cash Flows

Examine the operating activities

section carefully.
▫ Ed’s Pizza Hut generated a negative
net cash provided by operating
activities of $20,000. This is usually a
sign of fundamental difficulties.
▫ Ultimately, a positive cash flow is
necessary to avoid liquidating assets
or borrowing money to pay for day-to-
day activities.
13-45

Learning Objective 4

Compute free cash flow.

13-46

Free Cash Flow

Free cash flow measures a company’s
ability to fund its capital expenditures and
dividends from its net cash provided by
operating activities.

Net Cash Provided by Capital

Free Cash Flow =
Operating Activities
- Expenditures
- Dividends
13-47

Free Cash Flow

Using the equation shown on the prior slide,
the free cash flow for Ed’s Pizza Hut of
($51,000) is computed like this . . .
Net Cash Provided by Capital
Free Cash Flow =
Operating Activities
- Expenditures - Dividends
$ (51,000) = $ (20,000) - $ 28,000 - $ 3,000
Appendix 13A
The Direct Method of Determining
the Net Cash Provided by
Operating Activities.
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
13-49

Learning Objective 5

Use the direct method to

determine the net cash
provided by operating
activities.
13-50

Computing Net Cash Provided by

Operating Activities
The direct method computes net cash provided
by operating activities by reconstructing the
income statement on the cash basis from top to
bottom.
However

The amount of net cash provided by operating

activities under the direct method will always
agree with the amount computed using the
indirect method.
13-51

Similarities and Differences

Add (+) or
Deduct (-) to
Adjust to a
in Handling Data
Revenue or Expense Item Cash Basis
Sales revenue (as reported)
Adjustments to a cash basis:
1 Increases in accounts receivable -
2 Decreases in accounts receivable + Adjustments for accounts that
Cost of goods sold (as reported)
affect revenue are the same in
Adjustments to a cash basis: the direct method and indirect
3 Increase in merchandise inventory +
4 Decrease in merchandise inventory - methods.
5 Increase in accounts payable -
6 Decrease in accounts payable +

Operating expenses (as reported)

Adjustments to a cash basis:
7 Increase in prepaid expenses +
8 Decrease in prepaid expenses - Adjustments for accounts that
9 Increase in accrued liabilities -
10 Decrease in accrued liabilities + affect expenses are handled in
11 Period's depreciation, depletion and
amortization charges
-
opposite ways for the direct and
indirect methods.
Income tax expense (as reported)
Adjustments to a cash basis:
12 Increase in accrued taxes payable -
13 Decrease in accrued taxes payable +
14 Increase in deferred income taxes -
15 Decrease in deferred income taxes +
13-52

Direct Method: Gains and Losses

Regarding gains and

losses on sale of assets,
no adjustments are
needed at all under the
direct method.
13-53

The Direct Method

Ed's Pizza Hut
Comparative Balance Sheet Account Balances
Let’s revisit the
3/31/2009 3/31/2008 Change
DR (CR) DR (CR) Incr. (Decr.) comparative
Cash $ 71,000 $ 90,000 $ (19,000) balance sheet
Accounts Receivable 23,000 40,000 (17,000)
Inventory 322,000 300,000 22,000 account
Land
Equipment
68,000
112,000
100,000
84,000
(32,000)
28,000
balances for
Accumulated Depr. (45,000) (39,000) 6,000 Ed’s Pizza Hut.
Accounts Payable (38,000) (27,000) 11,000
Salaries Payable (9,000) (14,000) (5,000)
Note Payable - Joe Doe - (50,000) (50,000)
Common Stock (500,000) (450,000) 50,000
Retained Earnings (4,000) (34,000) (30,000)
$ - $ -
13-54

The Direct Method

Ed's Pizza Hut
Income Statement
For the Year Ended 3/31/2009
Sales $ 1,000,000
Cost of goods sold 750,000
Gross margin 250,000
Operating expenses 277,000
Let’s assume
Net loss $ (27,000) that Ed’s Pizza
Hut prepared
this income
statement.
13-55

The Direct Method

Step 1: Translate sales revenue into cash

collected from customers.

Sales (as reported) $ 1,000,000
Add: Decrease in accounts receivable 17,000
Cash collected from customers $ 1,017,000
13-56

The Direct Method

Step 2: Translate cost of goods sold into
cash disbursements for purchases.

Cost of goods sold (as reported) $ 750,000

Add: Increase in inventory 22,000
Less: Increase in accounts payable (11,000)
Cash paid for purchases $ 761,000
13-57

The Direct Method

Step 3: Translate operating expenses into cash
paid for operating expenses.

Operating expenses (as reported) $ 277,000

Add: Decrease in salaries payable 5,000
Less: Increase in depreciation (6,000)
Cash paid for operating expenses $ 276,000

There is not an adjustment needed for

income taxes because Ed’s Pizza Hut has
a net loss of $27,000.
13-58

The Direct Method

Ed's Pizza Hut
Statement of Cash Flows
For the Period Ending 3/31/2009
Operating Activities Notice that the
Cash received from customers $ 1,017,000 net cash
Cash paid for purchases (761,000)
Cash paid for operating expenses (276,000) provided by
Net cash flow from operations (20,000) operating
Investing Activities
Proceeds from sale of land 32,000 activities agrees
Purchase of equipment (28,000) with that
Net cash flow from investing activities 4,000
Financing Activities
computed using
Dividends paid (3,000) the indirect
Net change in cash (19,000)
Cash, beginning 90,000
method.
Cash, ending $ 71,000
13-59

End