Earlier in this chapter we illustrated the statement of cash flows of Allison Corporation. We will now show how this statement was developed from the company’s accrual-basis accounting records.
Revenue. expenses, and represent changes in owners’ equity and, therefore, may be regarded -as own,’ equity account”.Basically, a statement of cash flows can be prepared from the date continental in an income statement and comparative balance sheets at-the beginning fund end of the period. It is also necessary, however, to have some detailed information about the occur.
• ring during the period in .certain balance sheet accounts. Shown below and on the next two pages are Allison’s income statement and comparative balance sheets for the current year. along with necessary information about the changes in account balances. Additional Information An analysis of changes in the balance sheet account’s of Allison Corporation provides the following Information about the company’s activities in ‘the current year. To assist in the preparation of a statement of cash flows. we have classified this information into the categories of operating activities. investing activities. and financing activities. Plating Activities .
1 Accounts receivable increased by $30.000 during the year.
2. Dividend revenue-is recognized on the cash basis, but interest revenue is recognized on the accrual basis. Accrued interest receivable decreased by $1.Ono During the year.
3. inventory increased by $10,000 and accounts payable increased by $15.!KlO during .the year
4. During the year, short-term prepaid expenses increased by $J.()(K) anti accrued expenses payable (other than for-interest or income lazes) ‘decreased by $6.000. Depreciation for the year amounted to $40.000
5. The accrued liability for interest payable increased h $7.()(Kl ding
6. The accrued liability for income Axes payable decreased by during the year, Investing Activities
7. Analysis of the Marketable Securities count shows debit entries if $ representing the cost of securities purchased. and credit entries (If $ representing the cost of securities sold. (None of the marketable securities is viewed as a cash equivalent.) ,
8. Analysis of the Notes Receivable account shows. $17 .Quoin debit entries. representing cash loaned to borrowers by Allison Corporation during the year credit entries. representing collections of notes receivable. (Collections of interest were
10. During the year, Allison Corporation borrowed $45,000 cash by issuing short-term, notes payable to banks. Also, the company repaid $55.000 in principal amounts due on these loans and other notes payable. (Interest payments are classified as operating activities.) II. The company issued bonds payable for $100,000 cash.
12. The company issued for cash 1,000 shares of $10 par value capital-stock at a price Of $50 per share
13. Cash dividends declared and paid to stockholders amounted to $40,000 during the year. Cash and Cash Equivalent 14. Cash and cash equivalents as shown in Allison Corporation’s balance sheets amounted to $20,000 at the beginning of the year and $55,000 at year-end-a net increase of $35,000.
Using this information, we will now illustrate the steps in preparing Allison Corporation’s statement of cash flows and a supporting schedule disclosing the non-cash investing and financing activities. In our discussion, we will often refer to these items of additional information by.citing the paragraph numbers shown in the list just described. The distinction between accrual-basis ‘measurements and cash flows is of fundamental importance in understanding financial statements and other accounting reports, To assist in making this distinction, we use two ‘colors in our illustrated computations.
We show in blue.the accrual-based data from Allison Corporation’s income statement and the preceding numbered paragraphs. The cash flows that we compute from these data are shown in red. Cash Flows from Operating Activities As shown in our statement of cash flows on page 555, the net cash flows from operating activities are determined by combining certain cash inflows and subtracting certain, cash outflows. The inflows are cash received from customers, and-interest and dividends received; the outflows are cash paid to suppliers and employees, inter-
•. paid, and income taxes paid.
• In computing each of these cash flows, our starling point is an income statement amount, such as net sales, cost of goods sold, or interest expense. As you study each computation, be sure that you understand why the income statement amount must be increased or decreased to determine the related cash flows. You will find that an
understanding of these computations will do more than show you how to compute cash flows; it will also strengthen your understanding of the income statement and the balance sheet. Cash Received from Customers To the extent that sales are made for cash. there is no difference between the’ amount of cash received from customers and the amount recorded as sales revenue.
Differences do arise. however. when sales are made on account. If accounts receivable have increased during the year. credit sales have exceeded collections of accounts receivable. Therefore, we must deduct, the increase in accounts receivable over the year from net sales in order to determine the amount of cash received. If ac- .counts ‘receivable have decreased over the year, collections of these accounts must have exceeded credit sales.
Therefore, we must add the decrease in accounts receivable to net sales to determine the. amount of cash received. The relationship between cash received from customers’ and net sales is summarized below:The increase or decrease in accounts receivable is determined simply ‘by’ comparing the year-end balance in the account to-its balance at The beginning of the year.
In our Allison Corporation example, paragraph of the additional information tells us that accounts receivable- have increased by $30,000 during the year. The income statement shows net sales for’ the year of $TOQUE ,EOE. Therefore, the amount of cash received from customers may be computed as follows: