8. Bringing it All Together

Let's work our way all the way through this problem, all three sections. First section is operating, and we're always gonna start with net income. Then we wanna add in any depreciation, amortization, add any losses, and subtract any gains. And then we get down to all the current asset, current liability stuff. Let's start with depreciation and amortization. I'm just gonna do this real quick 'cause we already did another video on it. On this problem, we have to find the depreciation expense, unfortunately. We know that accumulated depreciation started at 52 and ended at 50. There was also some asset disposal, and then that will lead us to our depreciation expense.

So the cash we got was 1,500. 1,500 cash. The plant, property, and equipment that we sold was 57,500, and the loss was 7,500, leaving us with accumulated depreciation attached to these assets of 48,500, and therefore our depreciation expense was 46,500. So we get to add back the 46,500. Then we also can just go ahead and add back this loss on plant assets of 7,500. It is an investment activity, first of all, so it's not operating. And second of all, this is the cash portion of the investment activity. This is just a paper loss for revenue recognition purposes.

We had a loss. We didn't have any gains. So now we're down to the current asset and current liability section. I managed to remember that you're supposed to add a decrease in a current asset. So let's work our way through this little quadrant and figure out the rest. This is an increase, a decrease, an increase. These are the same account going different ways. These are different accounts going the same way, and that leaves a plus over here. So now I know for all four of my possibilities whether I need to add them or subtract them. So now let's go through and mark all of these accounts.

Cash and cash equivalents is the one we're gonna use to verify our cash flow statement, so we leave that out. Accounts receivable is a current asset. Inventory is current asset. Any prepaid is a current asset. Investment is an investment. Plant assets, that's also investing. And accumulated depreciation is a contra asset, contra long-term asset. Accounts payable, current liability. Expenses payable, current liability. Bonds payable, financing. Common stock, financing. APIC, financing. Retained earnings, shareholders' equity, irrelevant. Okay, now let's go back and find out whether they increased or decreased. 33 to 98 increased. 102, 112 increased. 16, 18 increased. 67, 92 increased. 17, 16.5 decreased finally.

Okay, let's start with accounts receivable. Accounts receivable increased. A current asset increased, so we're gonna subtract whatever the difference is. The difference there is $57,800. I said I was going to subtract it, so we'll subtract it. Okay? Accounts receivable's done. Well, let's check over here first. New plant assets, not accounts receivable. Old plant assets, no. Bonds, no. Cash dividend, no. So I'm just checking over here to make sure there's not any supplemental information about accounts receivable. I guess that could be maybe an account write-off or something, but I just wanna make sure that I'm reading this problem to make sure that none of this information pertains to anything that I'm working through right now.

And actually, this one is investing, investing, financing, financing. Great. So we don't have to look at these right now. Let's keep going. Inventories went up, so we're gonna subtract again. So that's a subtract 9,650. That's the difference between these two guys. Prepaid expenses went up by $2,400, and you have to use cash to prepay anything. So 2,400 we're gonna subtract again. Moving down to accounts payable. Accounts payable went up. A current liability went up, so let me find that one. Current liability went up, so okay, I'm gonna add this one. That went up by 24,700, so I add 24,700.

That one's done. Accrued expenses payable went down, decreased, a current liability. Okay, so that's another subtraction, and that one's just 500. So we just subtract the 500 there. Great, so that should be all of them, and I'm gonna rearrange this just a little bit because some of your professors are gonna like to see it in a different format. So you've got the net income over here, and then you'll have some subtotal of all of these things. And we're gonna put that just right out here. Let's add these up. 46,500 plus 7,500 minus 57,800 minus 9,650 minus 2,400 plus 24,700 minus 500.

That leaves us with 8,350. Not very much. For a total of 159,250. And all I did here was subtotal all of these guys together and then put it out here in this other column. And obviously, you'll probably wanna label these things on the test. Now we've got cash flow from operations. Wasn't that bad. Cash flow from operations, 159,250. Now let's move on to investing. Let's go back up here and see what we're dealing with. Get rid of all this mess.

The first thing I wanna look for is cash proceeds from anything. And I can see over here that we sold some plant, property, and equipment for 1,500. So that would be cash proceeds for sure. Let me make an investing section and add proceeds from the sale, 1,500.

And let me check our investments account here. Investments went up. So if investments went up, that means we bought more investments. So that's not gonna be a cash proceed. That's not gonna be cash received, that's gonna be cash paid. We also know that we bought new plant assets for cash. Okay? So let's fly through how to calculate that. We've got our PP&E account. It is an asset account, so we're gonna put the beginning balance, 242,500, and the ending balance is 270.

But we also sold out 57,500, so we purchased 85,000. This is how much we purchased for cash. So we need to reduce that. We need to subtract that out because that was a cash expenditure. That was a cash payment. And then we need to also include that one I noted about investments. It looks like we went from 94 to 108, so it looks like we spent 14,000 on new investments. And investments obviously go in the investing category. So we're gonna subtract 14,000 for these investments also. Now we've got our total cash used by investment activities at 97,500. 85 and 14 is 99, less 1,500 is 97,500.

So we have cash used in investments. Okay? We're getting close. We've got one more. We've got the financing section. Let's look for things that would probably be financing. Bonds payable, common stock, APIC, bonds, and dividend. Those are the things that to me look like they are related to financing. Let's take a look first at this number three, bonds matured and were paid off at face value for cash. So we know that we paid off the bonds, and it looks like bonds payable went from 110 down to 85. So it looks like we paid off 25,000 in bonds. And we had to use cash to do that.

So down in our financing section, we're gonna say cash payments for bonds payable. Okay? So we paid off 25,000 of those bonds payable. So we took care of that one. What about this cash dividend was declared and paid? We know that cash dividends decrease our cash flow, obviously, because we pay cash for them. But how much was the dividend? I don't see the dividend anywhere on here. Well, like I said, this problem tests a lot of your knowledge. If you'll remember, retained earnings plus net income less dividends is ending retained earnings. We've got these three numbers. We can find out our dividend. Retained earnings, 105,450; net income, 150,900, pulling that straight from here.

Ending retained earnings is 234,000. And that leaves us with a dividend of 22,350. So we know that we paid cash, a cash dividend of 22,350, and dividends belong in the financing section. Minus 22,350. I promise we're almost done. The last thing we need to look out for is stock issuance. Here, our stock went from 150 to 180. We know that we issued 30,000 worth of par value, but don't forget APIC. It looks like that went from 25 to 40, which means when we issued the shares that represent that 30,000, part of that was over the par value, and so we had an additional 15,000 for a total of $45,000 cash received for stock.

The journal entry would have looked like this: cash, 45,000; common stock, 30; APIC common stock, 15. So the cash we received was 45, so we need to put our 45 down here, plus 45,000 for the issuance of stock.

And if we add all those up, we come out to negative 2,350. So the cash used in financing was 2,350. Now let's zoom out a little bit and see if we're actually right. What is our total cash flow? We've got 159,250, less 97,500, less 2,350. So I think our total cash flow is 59,400. So let's write 59,400 as your total cash flow.

And then thank goodness, we can actually check that. So if we think that our total cash flow was an increase of 59,400, well, let's go back up here, zoom back in a little bit, and see how much did our cash actually change. 'Cause if I'm telling you that from our cash flow statement, we went up by 59,400, we should be able to find that difference here. So if we did 97,800 less 38,400, turns out we get 59,400, which either means we're right or we did a couple of things wrong. But you should be able to tie out the total from your cash flow statement to the change in cash and cash equivalents on your balance sheet.

Because that's what this whole thing is for. The cash flow statement is to show you, we know that your cash changed by some amount, in this case, 59,400. The statement of cash flows should be able to show you where and why and how it changed. We did great in operations. It went up by almost $160,000. In investing, it's not that we did poorly, it's just that we put a lot of money in. And in financing, we used just a little bit of money. Now, what would be very interesting is if your cash from operations was extremely low or even negative and your cash from investing was positive.

That would tell you your actual business doesn't really provide a lot of cash, and it was this ancillary investing activity that actually kept you afloat. So always, always check when you get done, what did I say that my cash flow was, and does that tie to the balance sheet? If it doesn't, that means you've done something wrong.