accounting_principles_12th_ed_by_weygandt

758 17 Statement of Cash Flows
4–8. Next, post each of the changes to the noncash current asset and current
liability accounts. For example, to explain the $10,000 decline in Computer
Services’ accounts receivable, credit Accounts Receivable for $10,000 and
debit the operating section of the Cash T-account for $10,000.
9. Analyze the changes in the noncurrent accounts. Land was purchased by
issuing bonds payable. This requires a debit to Land for $110,000 and a
credit to Bonds Payable for $110,000. Note that this is a significant noncash
event that requires disclosure at the bottom of the statement of cash flows.
10. Buildings is debited for $120,000, and the investing section of the Cash
T-account is credited for $120,000 as a use of cash from investing.
11. Equipment is debited for $25,000 and the investing section of the Cash
T-account is credited for $25,000 as a use of cash from investing.
12. Common Stock is credited for $20,000 for the issuance of shares of stock,
and the financing section of the Cash T-account is debited for $20,000.
13. Retained Earnings is debited to reflect the payment of the $29,000 dividend,
and the financing section of the Cash T-account is credited to reflect the use
of Cash.
At this point, all of the changes in the noncash accounts have been explained. All
that remains is to subtotal each section of the Cash T-account and compare the total
change in cash with the change shown on the balance sheet. Once this is done, the
information in the Cash T-account can be used to prepare a statement of cash flows.
REVIEW AND PRACTICE
LEARNING OBJECTIVES REVIEW
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Discuss the usefulness and format of the statement of
cash flows. The statement of cash flows provides information
about the cash receipts, cash payments, and
net change in cash resulting from the operating, investing,
and financing activities of a company during the
period. Operating activities include the cash effects of
transactions that enter into the determination of net
income. Investing activities involve cash flows resulting
from changes in investments and long-term asset
items. Financing activities involve cash flows resulting
from changes in long-term liability and stockholders’
equity items.
Prepare a statement of cash flows using the indirect
method. The preparation of a statement of cash
flows involves three major steps. (1) Determine net
cash provided/used by operating activities by converting
net income from an accrual basis to a cash
basis. (2) Analyze changes in noncurrent asset and
liability accounts and record as investing and financing
activities, or disclose as noncash transactions.
(3) Compare the net change in cash on the statement
of cash flows with the change in the Cash account
reported on the balance sheet to make sure the
amounts agree.
Analyze the statement of cash flows. Free cash flow
indicates the amount of cash a company generated
during the current year that is available for the payment
of additional dividends or for expansion.
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Prepare a statement of cash flows using the direct
method. The preparation of the statement of cash
flows involves three major steps. (1) Determine net
cash provided/used by operating activities by converting
net income from an accrual basis to a cash basis.
(2) Analyze changes in noncurrent asset and liability
accounts and record as investing and financing activities,
or disclose as noncash transactions. (3) Compare
the net change in cash on the statement of cash flows
with the change in the Cash account reported on the
balance sheet to make sure the amounts agree. The
direct method reports cash receipts less cash payments
to arrive at net cash provided by operating activities.
Use a worksheet to prepare the statement of cash
flows using the indirect method. When there are
numerous adjustments, a worksheet can be a helpful
tool in preparing the statement of cash flows. Key
guidelines for using a worksheet are as follows. (1) List
accounts with debit balances separately from those
with credit balances. (2) In the reconciling columns in
the bottom portion of the worksheet, show cash inflows
as debits and cash outflows as credits. (3) Do not enter
reconciling items in any journal or account, but use
them only to help prepare the statement of cash flows.
The steps in preparing the worksheet are as follows.
(1) Enter beginning and ending balances of balance
sheet accounts. (2) Enter debits and credits in reconciling
columns. (3) Enter the increase or decrease in cash
in two places as a balancing amount.