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.
I have isolated the Cash account below:
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:
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:
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?