# Cash Flow Zero: Solution

Here are the entries for Cash Flow Zero. Let us focus on the Cash account, which ends up with a final balance of \$145,830. If you track every entry in cash, you could categorize each debit and credit as to whether it is an Operating, Investing or Financing transaction.

ASSETS

LIABILITIES

STOCKHOLDER

EQUITY

 Cash 100,000 36,000 300,000 200,000 18,170 145,830
 Acc Payable
 Common Stock 100,000
 Ret Earnings

 Notes Pay
 Oper Exp 200,000
 Service Rev 300,000
 Accts Rec

 Depr Exp 12,000

 Equipment 36,000
 Acc Depr 12,000
 Inc Tax Exp 18,170

I have isolated the Cash account below:

 Cash F 100,000 36,000 I O 300,000 200,000 O 18,170 O 145,830

I have identified the type of transaction for each item in the Cash account. There was one Financing transaction (issuance of stock); one Investing transaction (purchae of equipment) and three Operating transactions: (receipt of cash for revenues, payment of operating expenses, and payment of income taxes). The Cash account started with a balance of zero and ended up with a balance of \$145,830.

Here's a cash flow statement for this situation:

 CASH FLOWS FROM OPERATIONS Cash Receipts from Customers 300,000 Operating Expense Paid in Cash (200,000) Income Tax Expense (18,170) Total Cash from Operations 81,830

 CASH FLOWS FROM INVESTING Purchase of Plant Assets (36,000) Total Cash Received (Used) (36,000)

 CASH FLOWS FROM FINANCING Issuance of Stock 100,000 Total Cash Received (Used) 100,000

 Total Cash Flows 145,830 Plus Beginning Cash Balance 0 Ending Cash Balance 145,830

# Using the Indirect Method for Cash Flow Zero

Refer to the "recipe" for the Indirect Method. Here is a short cut to arrive at the Cash Flow from Operations Figure, \$81,830. Start with the net income and add back Depreciation Expense. Then look at how receivables and payables changed during the period. Did they increase, decrease or stay the same?

The net income can be computed by subtracting the expenses from the revenue. The net income = 300,000 - 200,000 - 12,000 - 18,170 = \$69,830. You should verify this amount by examining the T-accounts above.

Here is a calculation of Cash Flow from Operations, using the Indirect Method:

 CASH FLOW FROM OPERATIONS Net Income 69,830 + Depreciation Expense +12,000 - increase (OR + decrease) in A/R + increase (OR - decrease) in A/P Total Cash from Operations 81,830

Note that this calculation arrives at the same figure for Cash Flow from Operations as did the "cash account" method above.

Can you use the same approach to calculate the Cash Flow from Operations for Cash Flow One?