A WORKSHEET’ FOR PREPARING A STATEMENT OF CASH FLOWS
A’statement of cash flows is developed by systematically analyzing changes in the non cash balance sheet accounts. This process can be nationalized and documented through the preparation of a specially designed worksheet. The worksheet also provides the accountant with visual assurance that the changes in balance sheet accounts have been fully
Data for an Illustration
We will illustrate the worksheet approach using the 2001 financial data of Auto Supply Co. I Shown below are the balances in Auto’s balance sheet accounts at the beginning and end of 2001. (Please notice in this illustration that the account balances at the end of the current year appear in the right-hand column. This nonfat also will be used in the worksheet.)
The following information also will be used in the preparation of the worksheet. (Accrual-based measurements appear in blue; cash flows, in red.) I. Net income for the year amounted to $250,000. Cash dividends of $/40,000 were declared and paid.
2. Auto’s only noncash expense was depreciation, which totaled $60,000.
3. Marketable securities costing $/5,000 were sold for $35,000 cash, resulting in a $20,000 non operating gain ‘Our .example involving Allison Corporation was quite comprehensive. Therefore, a worksheet for Allison , Corporation would be too long and detailed for use as an introductory illustration
4. The company purchased plant assets for $100,000, making a $30.0()() cash down payment and issuing a $70,000 mortgage.note payable for the balance of the purchase price.
The Worksheet Auto Supply Co. reports.cash flows ‘from operating activities by the indirect method.’ A worksheet for, preparing ‘a statement of cash flows appears on the following page.’ Let us briefly explain this worksheet.
The company’s balance sheet accounts are listed’ in the top portion of the worksheet, with the beginning balances in the first column and the year-end balances in the last (right-hand) column. (For purposes of illustration. we have shown these accounts and account ‘balances in black.) ,
The twp middle columns ,are used to (1) explain the changes in eachbalance sheet, ‘ account over the year and (2) ‘indicate how each change affected.cash, Entries In tbe “‘0 Middle Columns ‘The entriesin the top portion of the worksheet ” summarize the transactions recorded in the account over the year. (Because these entries summarize .deconstructionism on the liccrual basis. theyare shown in blue.
For esch summary entry in the ‘top portion of the worksheet. we-make an offsetting entry (in the opposite¢ column) in the bottom portion of the worksheet indicating the cash “eJleqts of the transactions. These cash effects are classified-as operating, investing. or canning activities arid are explained with Ii descriptive caption. (Entries representing the caSh effect« of transactions and the related descriptive ‘captious,ns appear in ,red.)
Entries inthe two middle columns may be made in any.sequence, but.we recommend , the following approach.approach. Explai~the changes in the Retained Earnings account,2. Account for depreciation expense (and any-other non-cash expenses) Account for timing’ differences between’ net income and cash f1~ws from operating activities.
4 Explain remaindering changes in balance sheet accounts other than Cash. (Hint: Changes in-asses; accounts will represent investing activities; changes in liability and equity accounts will represent financing activities. 5. Compute’ and record the net increase or decrease in cash.
Using this approach, the entries in our illustrated worksheet.are explained ‘next Step Explain the changes in retained earnings ,Entry
1.’ Auto’s net income explains ‘a $250,000′ credit’ to the Retained Earnings account. In the bottom portion of the working paper. an offsetting entry is ‘made in the’ Sources column and is-classified as an .operating activity
2.’ Cash dividends of $140.000 caused a debit to the Retained Earnings account during 2001.
The offsetting entry falls into the Uses column; payments of dividends are classified as a financing activity. With these first two entries. we expiated how Auto’s Retained Earnings account increased during 200 l from $380,000 to$:493. Auto’s ,only’ non expense’ was depreciation.
In the top portions of the ‘sheet depreciation explains a’ $60.000 credit (decrease) in Plant and Equipment (which includes the Accumulated Depreciation accounts). The offsetting entry in ‘the bottomofthe WOfkshc~tts placed in the Sources column. We have explained , that depreciation is not really a source of cash, but that it is added back to net income as a step in computing the cash flows from operating activities. Step
2: Account (or non cash expenses 21 f the worksheet utilizes the direct method, numerous sub classifications are required within the operating antivivisectionist. Such worksheets are illustrated in more advanced accounting courses, When the indirect method is used, net income serves as the starring point for computing net cash flows from operating activities
Fluctuation current assets and current liabilities create timing differences between net income and the net cash flows from operating activities. In the top portion of the worksheet, entries (4) ‘through (7) summarize the changes in these current asset and current liability accounts. In the bottom portion, they show how these changes affect the computation of cash flows from operating activities 8. In 2001, Auto sold marketable securities with a cost of $15,000 for $3 cash, , resulting in a $20,000 non operating gain. In the top portion of the worksheet. the entry explains the $15,000 credit change in the Marketable Securities account.
In the bottom portion, it reports cash proceeds of $35,000. The difference? The $20,000 non operating gain, which is removed from the Operating Activities section of the worksheet and included instead within the amount reported as “Proceeds from sales of marketable securities.” 9. Auto purchased $100,000 in plant assets, paying $30 slip cased ‘issuing a $70,000 note payable.
These events explain a $100;000 debit in Plant and’ Equipment and the $70,000 credit change in Mortgage Note Payable; they involved a . cash outlay of $30,000, which is classified as an investing activity. (The $70,000 financed ‘by issuance of a note payable is a ‘non cash investing and financing’ activity.) , 10. The $150,000 credit change in Auto’s Bonds Payable account indicates that this , amount of the liability has been repaid-that is, $150,000 in bonds ‘hit been . retired.
At this point, we should check to determine that our entries in the two middle columns , fully explain the differences between the beginning and ending balance of each non cash balance sheet account. If the top portion of the worksheet explains the changes in every non cash account, the bottom section should include all of the cash flows for the year (x)
We now total the Sources and Uses columns in the bottom portion of the worksheet.
The difference between these column subtotals represents the net increase or decrease in cash.
In ‘our example, the Sources column totals $360,000, while the Uses column totals $365,000, indicating a $5,000 decrease in cash over the period. Notice that this is exactly the amount by which Cash decreased during 2001: $50,000 — $45,000 = $5,000.
Our last entry, labeled (x), explains the credit change in the Cash account at the top of the worksheet and brings the bottom of the worksheet into balance.
A formal statement of cash flows. reporting the cash flows from operating activities by the indirect method, can be prepared directly from the bottom portion of this worksheet. (Amounts appearing in accrual-based accounting records are shown in blue; cash flows appear in red.)