1. Using a comparative balance sheet (two years) find the differences in the accounts 2. Make sure you are finding the change from the old year to the new year as far as increases or decreases are concerned 3. The change in cash will be the answer to the problem. Sometimes this helps find an error if it doesnt work and this way you always know what the answer should be Part 1 Cash Flow from Operating Activities Step 1 - Starts with Net Income or Net Loss Step 2 - Adjustments 1. Add back non cash expenditures such as depreciation and amortization (they were subtracted to find the net income but did not involve the outlay of cash) 2. Gains and losses on sale of equipment, etc (their effect on the income needs to be taken off as this is from operating activities and they had nothing to do with operations, add the loss back on, subtract the gain that was added) 3. Current Assets a. The change in all current assets with the exception of cash will be listed here b. Increase in a current asset is a decrease in cash flow c. Decrease in a current asset is an increase in cash flow Hints current assets effect is the opposite, if the asset increases the effect on cash flow is a decrease, if the current asset decreases the effect on cash flow is an increase. If the money is no longer tied up in assets, it is available for use. For example if A/R decreases, customers are paying you for this year and paying what they owed from last year. If the A/R increases then customers are buying on credit and it should make sense that your cash flow would decrease. 4. Current Liabilities a. The change in all current liabilities with the exception of any financing activity or dividends will be listed here b. Increase in a current liability is an increase in cash flow c. Decrease in a current liability is a decrease in cash flow Hints current liabilities effect is the same, if the liability increases the effect on cash flow is an increase, if the current liability decreases the effect on cash flow is a decrease. If you are purchasing on credit, your money is not tied up and is available for use. For example if A/P decreases, you are paying for this years credit purchases and for that which you owed from last year. If the A/P increases then you are buying on credit and it should make sense that your cash flow would increase. Step 3 - Summary of Operating Activities 1. Add up all the adjustments 2. Increase or decrease the net income depending on the numbers 3. The two together are the cash flow from operating activities Part 11 Cash Flow from Investing Activities Step 1 - This is where you will analyze all the long term assets. 1. Purchase of long term assets with cash will decrease your cash flow 2. Sale of long term assets will increase the amount of cash flow by the cash received Hints This section requires some analysis of the accounts. You cannot simply take the number change in the account. Start with the beginning balance and end with the ending balance. How did it get there? Purchases will increase the account but may decrease cash flow. Sales will decrease the account but will increase cash flow by the amount of cash received. What part of the transactions affects the cash flow? If the purchases were financed with loans, they are non-cash transactions that get recorded on the bottom. Step 2 - Summary of Investing Activities 1. Analyze each account in the long term assets 2. What made the account increase? 3. What made the account decrease? 4. Do these increases or decreases affect the cash flow? (Sometimes they dont, they are exchanges for other things but the accounts change) Step 3 - Total the changes to get the cash flow from investing activities Part III Cash Flow from Financing Activities Step 1 - Analyze all financing activities in the liabilities, short and long term 1. Borrow more money increases cash flow 2. Payment on loans decreases cash flow 3. Watch non-cash transaction where there is a direct exchange and the cash does not actually come into the business 4. Sale of stock increases cash flow 5. Purchase of treasury stock decreases cash flow 6. Payment of dividends decreases cash flow but remember this is dividends paid, not declared 7. Retained earnings is the other account that should not show up on the statement, it increases by net income and decreases by dividends declared, both of which have been included elsewhere in the statement Step 2 - Add all the changes in financing activities Step 3 - Make sure when you did the analysis of the debt that you included current and long term activities. 1. Payments on debt are usually in the current portion but there is usually an adjusting entry that reclassifies long-term debt to current. This does not affect the cash part but does change account balances. Summary Step 1 - Add the amounts from the three sections of the cash flow statement, this is your change in cash Step 2 - Add the beginning cash balance to this summary of changes Step 3 - The result should be the ending cash balance The nice thing about the cash flow statement is you always know what the answer is. You should end up with the change in cash from the beginning of the year to the end of the year. This added to the beginning balance should give you the ending balance Alexander Company Comparative Balance Sheets December 31, 2013 and December 13, 2014 Assets 2013 2014 Difference Cash 40,000 334,000 294,000 Accounts Receivable 255,000 215,000 (40,000) Inventory 430,000 350,000 (80,000) Prepaid Expenses 2,000 1,200 (800) Plant Property & Equipment 1,104,000 1,256,000 152,000 Accumulated Depr - Equipment (280,000) (366,000) (86,000) Total Assets 1,551,000 1,790,200 239,200 Liabilities & Stockholders Equity Accounts Payable 74,000 118,000 44,000 Notes Payable (Current) 160,000 60,000 (100,000) Accrued Liabilities 51,000 67,000 16,000 Mortgage Payable 560,000 720,000 160,000 Common Stock $10 par value 400,000 400,000 - Retained Earnings 306,000 425,200 119,200 Total Liabilities & S/E 1,551,000 1,790,200 239,200 Additional information: 1. Net income $239,200 2. Depreciation expense $120,000 3. Sold equipment that cost $48,000 with accumulated depreciation of $34,000 at a loss of $8,000 4. Land and building purchased with a mortgage $200,000 5. Paid on the mortgage $40,000 6. Paid dividends $120,000 7. Repaid a note in the amount of $160,000 8. Issued a note payable $60,000