In addition to recognizing what type of activity transactions are describing, it is important to recognize whether a transaction is an increase in cash or a decrease in cash. Determine whether the activity described results in an increase in cash or a decrease in cash.

Company purchased a factory	- Select your answer -Increase in CashDecrease in CashCorrect 9 of Item 1
Inventory decreased from previous year	- Select your answer -Increase in CashDecrease in CashCorrect 10 of Item 1
Company issued long-term bonds	- Select your answer -Increase in CashDecrease in CashCorrect 11 of Item 1
Company paid common dividends	- Select your answer -Increase in CashDecrease in CashCorrect 12 of Item 1
Accounts Receivable balance increased from previous year	- Select your answer -Increase in CashDecrease in CashCorrect 13 of Item 1

Think about the entries that are made and how they affect cash. For example, an increase in inventory would require a use of cash. The entry would be a debit to Inventory and a credit to Cash. This decreases cash. A decrease in inventory would have the opposite effect. It would be an increase to cash.

There are two methods of reporting the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows.

Selected information from Rowe Publishing Company's Income Statement

Selected information from Rowe Publishing Company's Balance Sheets

Direct method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2013
Cash flow operating activities:
Cash collected from customer	$ 1,042,000
Cash paid to suppliers	(586,000)
Cash payments to employees	(347,000)
Cash payments for interest	(16,000)
Paid income taxes	(29,000)
Net cash provided by operating activities		$ 64,000
Cash flows from investing activities:
Equipment purchase	$ 25,000
Net cash used for investing activities		(25,000)
Cash flows from investing activities:
Repayment of notes payable	$ (35,000)
Proceeds from issuance of bonds payable	50,000
Payment of dividends	(35,000)
Net cash used for financing activities		(20,000)
Net increase (decrease) in cash		$ 19,000
Cash, 12/31/2012		66,000
Cash, 12/31/2013		$ 85,000

Indirect method:

Rowe Publishing Company Statement of Cash Flows For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income		$69,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$ 15,000
Increase in accounts receivable	(9,000)
Increase in inventory	(20,000)
Increase in accounts payable	12,000
Increase in salaries payable	4,000
Decrease in income taxes payable	(7,000)	(5,000)
Net cash provided by operating activities			$ 64,000
Cash flows from investing activities:
Equipment purchase		($ 25,000)
Net cash used for investing activities			(25,000)
Cash flows from financing activities:
Repayment of notes payable		($ 35,000)
Proceeds from issuance of bonds payable		50,000
Payment of dividends		(35,000)
Net cash used for financing activities			(20,000)
Net increase (decrease) in cash			$ 19,000
Cash, January 1, 2013			66,000
Cash, December 31, 2013			$ 85,000

Notice that the difference between the two methods is the - Select your answer -operatinginvestingfinancingCorrect 1 of Item 2 activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adds back non-cash items and increases and decreases in the balances in current assets.

Compare the two statements to determine how the methods differ.

The balance sheets for Byron Manufacturing at December 31, 2012 and 2013 are shown:

Byron Manufacturing Balance Sheets As of December 31, 2013 and 2012
Assets	2013	2012
Current assets:
Cash	5,290	9,280
Accounts receivable	10,310	8,850
Inventory	19,720	18,590
Total current assets	35,320	36,720
Property, plant, and equipment
Building	493,000	493,000
Equipment	278,000	271,900
	771,000	764,900
Accumulated depreciation	(147,400)	(119,650)
Net property, plant, and equipment	623,600	645,250
Total assets	658,920	681,970
Liabilities and Equity
Current liabilities:
Accounts payable	55,330	35,940
Salaries payable	9,560	11,900
Income taxes payable	1,030	9,970
Total current liabilities	65,920	57,810
Long-term liabilities:
Bonds payable	351,000	395,000
Equity:
Common stock	180,000	149,000
Retained earnings	62,000	80,160
Total equity	242,000	229,160
Total liabilities and equity	658,920	681,970

Additional Information needed to prepare the Statement of Cash Flows:

Net income was $2,520

Byron paid $20,680 in cash dividends

Byron issued $48,960 in bonds payable for cash

Byron retired $92,960 in bonds with cash

No fixed assets were sold or disposed of during the period

Fill in the table below to prepare the Statement of Cash Flows for Byron Manufacturing. The beginning balance column is taken from the 2012 Balance Sheet and the ending balance column is taken from the 2013 Balance Sheet. The Increase/Decrease columns represent the change in the accounts and will be debits or credits depending on the normal balance in the accounts. Most accounts will have either a debit or a credit. Accounts used in the non-operating sections of the Statement of Cash Flows are analyzed in more detail. Bonds Payable will show an increase and a decrease for the bond issue and retirement and Retained Earnings will increase with net income and decrease for cash dividends paid. The increases and decreases in the balance sheet accounts are increases and decreases in cash depending on the nature of the account. Follow the letters to see how the increase or decrease affects cash on the statement of cash flows. Click here for help with how changes in balance sheet accounts affect cash.

If an amount box does not require an entry, leave it blank or enter "0".

Byron Manufacturing Spreadsheet to Prepare the Statement of Cash Flows For the Year Ended December 31, 2013
	Beginning		Increase/Decrease			Ending
Balance Sheet Accounts	Balance		Debit	Credit		Balance
Cash					(m)
Accounts receivable	8,850	(h)	1,460			10,310
Inventory	18,590	(i)				19,720
Building	493,000					493,000
Equipment	271,900	(b)				278,000
Accumulated depreciation	119,650				(c)	147,400
Accounts payable	35,940			19,390	(j)	55,330
Salaries payable	11,900	(k)				9,560
Income taxes payable	9,970	(l)	8,940			1,030
Bonds payable	395,000	(e)			(d)	351,000
Common stock	149,000			31,000	(f)	180,000
Retained earnings	80,160	(g)			(a)	62,000
			Increase/Decrease in Cash
Statement of Cash Flows			Debit	Credit
Cash flow from operating activities
Net income		(a)
Adjustments to reconcile net income to net cash flow from operating activities
Depreciation expense		(c)
Increase in accounts receivable				1,460	(h)
Increase in inventory					(i)
Increase in accounts payable		(j)	19,390
Decrease in salaries payable					(k)
Decrease in income taxes payable				8,940	(l)
Cash flows from investing activities
Purchase equipment					(b)
Cash flows from financing activities
Issued bonds payable		(d)
Retired bonds payable					(e)
Issued common stock		(f)	31,000
Paid dividend					(g)
Net increase (decrease) in cash		(m)
			267,220	267,220

Now you can prepare the Statement of Cash Flows using the indirect method. Fill in the Statement based on the spreadsheet. Select Increase or Decrease and enter the amounts.

Byron Manufacturing Statement of Cash Flows For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income		$
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$
- Select your answer -IncreaseDecreaseCorrect 28 of Item 3 in accounts receivable	(1,460)
- Select your answer -IncreaseDecreaseCorrect 29 of Item 3 in inventory
- Select your answer -IncreaseDecreaseCorrect 31 of Item 3 in accounts payable	19,390
- Select your answer -IncreaseDecreaseCorrect 32 of Item 3 in salaries payable
- Select your answer -IncreaseDecreaseCorrect 34 of Item 3 in income taxes payable	(8,940)	33,270
Net cash provided by operating activities		$ 35,790
Cash flows from investing activities:
Purchase of equipment	$ (6,100)
Net cash used for investing activities		(6,100)
Cash flows from financing activities:
Proceeds from issuance of bonds payable	$
Retired bonds payable	(92,960)
Issued common stock
Payment of dividends	(20,680)
Net cash used for financing activities		(33,680)
Net increase (decrease) in cash		$
Cash, 1/1/2013
Cash, 12/31/2013		$