CF 0

CF 1

Stmt Format

Income Taxes

Indirect Method

Solution 0

Does NI=CF?

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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?