Working backward to cash receipts and disbursements

Hypothetical Financial Statements for May

Comparative Balance Sheets: at 31 May

May 31 April 30
Cash 10,500 10,000
Accounts Receivable 5,500 4,000
Inventory 16,000 15,000
Assets 32,000 29,000
Accounts Payable 3,000 1,500
Wages Payable 1,000 500
Contributed Capital 20,000 20,000
Retained Earnings 8,000 7,000
Liabilities & Equity 32,000 29,000
Income Statement: for the month of May

Revenues
Sales 10,000
Expenses
Cost of Goods Sold 5,000
Wage Expense 2,000
Rent Expense 1,000
Net Income 2,000

Assume:
• All sales are made on account
• All purchases of inventory are made on account
• Accounts payable relates only to purchases of inventory
• Assume the company credits Wages Payable for Wage Expense
before paying cash
Working backward to cash receipts and disbursements
(cont’d.)

Cash receipts from customers:----------------------------------

Cash payments to employees::----------------------------------
Cash payments for rent::-----------------------------------------
Cash payments to suppliers (for inventory)::------------------
Cash payments to shareholders::--------------------------------
+500
 Classification of Cash Flows
Operating Cash Flows
• Receipts from customers
• (Payments to suppliers)
• (Wage and salary payments to employees)
• (Payments for insurance, utilities, and rent)
• (Taxes paid)

Investing Cash Flows

• (Purchase of tangible fixed assets); proceeds from disposal
• (Purchase of intangible fixed assets); proceeds from disposal
• (Purchase of securities, including corporate acquisitions); sales of securities
• (Loans to other companies); receipt of loan repayments
Financing Cash Flows
• Proceeds from stock issuances; (stock repurchases; “treasury stock”)
• Proceeds from borrowings; (repayment of borrowings)
• Proceeds from bond issuances (retirement of bonds)
• (Dividends paid)
 Direct vs. Indirect Methods of Preparing the Cash Flow Statement
Indirect Method: Formula for the Operating Cash Flows
Source :
Net Income Income Statement
Plus: Depreciation T-account analysis
Less (Plus): Gains (losses) on disposal of T-account analysis
fixed assets*
Less (Plus): Net increases (decreases) in:
Accounts Receivable Balance Sheet
Inventories Balance Sheet
Prepayments Balance Sheet
Plus (Less) Net increases (decreases) in:
Accounts Payable Balance Sheet
Other Operating Payables (wages, taxes, rent) Balance Sheet
Advances from Customers Balance Sheet
Direct Method:
Operating Cash Flows
Cash receipts from customers 8,500
Cash payments to employees -1,500
Cash payments for rent -1,000
Cash payments to suppliers (for inventory): -4,500
1,500
Financing Cash Flows
Cash payments to shareholders -1,000
Net Change in Cash 500
 Direct vs. Indirect Methods of Preparing the Cash Flow Statement
Indirect Method: Formula for the Operating Cash Flows
Source :
Net Income Income Statement
Plus: Depreciation T-account analysis
Less (Plus): Gains (losses) on disposal of T-account analysis
fixed assets*
Less (Plus): Net increases (decreases) in:
Accounts Receivable Balance Sheet
Inventories Balance Sheet
Prepayments Balance Sheet
Plus (Less) Net increases (decreases) in:
Accounts Payable Balance Sheet
Other Operating Payables (wages, taxes, rent) Balance Sheet
Advances from Customers Balance Sheet
Review of Fixed Asset Accounts - Sample Journal Entries:
Purchases:
Equipment (A) XX
Cash (A) XX
Depreciation:
Depreciation Expense (SE-E) XX
Accumulated Depreciation (XA) XX
Disposal:
Cash (A) XX
Accumulated Depreciation (XA) XX
Equipment (A) XX
Gain on Disposal (SE-R) XX
or
Cash (A) XX
Accumulated Depreciation (XA) XX
Loss on Disposal (SE-E) XX
Equipment (A) XX
or
Cash (A) XX
Accumulated Depreciation (XA) XX
Equipment (A) XX