Roger Philipp, CPA, CGMA presents:
T-ACCOUNTS, DEBITS, AND CREDITS – OH MY! PREPARING A STATEMENT OF CASHFLOWS

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Welcome back. We’re going to now talk about preparing a statement of cash flows. Now, this is an important process, step by step how to prepare it. I’m going to go through the long version, because I want you to learn it. And then, as you’re going through the questions, you can take whatever short cut you want. But if you don’t understand it, it’s hard to take a short cut.

So, starting out, you’ll see here it says, “Preparing a statement of cash flows. “Step one, set up a statement of cash flows “in a three column format.” So, chances are, a question like this could be a drag or drop, fill in the blank. You may be asked to prepare just an operating, investing or financing activity section.

Back in my day, when I was your age, instead of having 15 minutes per task based simulation, we had an hour problem. We had four one hour problems. So what that meant was, you got a blue book, you just have to brain up, and prepare a whole statement of cash flows from scratch, and they asked that before.
Now it is, you just need to do sections of it.

But I want to kind of walk you through how to set up the statement, plus, it’s great for those in the real world, who’s like, “Oh my gosh, I finally understand what a statement of cash flows is for, and what the heck we’re doing.” Instead of just being a robot. La la la CPA, cut, paste and attach. CPA, certified pain in the– CPA, can’t pass anything. Anyway, so the point– Just kidding. The point is, that we need to learn what statement of cash flows is, so I’m going to walk you through it.

So step one, set up a three column format. I’m going to have debits, credits, change and cash. It says leave ample space. “At the bottom of the statement, fill in the amounts for the net increase or decrease in cash, and the beginning and ending balances of cash.”

So, we’re going to put in there, the cash balance. Because we know the answer, like jeopardy. “The answer is,” boom. The question is operating, investing and financing, and how the heck did we get to that number.

“Step two, set up a T account for every balance sheet account except cash.” Remember how earlier we set up T accounts, where you’re accounting for not the balance but the ch-ch-ch changes. That’s what happened during the year, when we set up out T accounts. 

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”Analyze the additional information, preparing journal entries for the transactions, and then post the debits and credits.” So we’re going to go through the journal entries. They’re going to say this happened, and this happened, and this happened, so all the additional information will set up our journal entries.

There’s going to be a couple of things that we do. It says, “Begin with net income, put the amount in “the increase column of operating activities, for cash flows if the direct method is used, enter it in the increase column of the supplementary schedule. In either case, indicate that it is net income. In addition, enter the same amount on the credit side, for retained earnings.”

So that of income, right? Income would be debit cash, credit retained earnings, or the opposite would be the case. So again, the main thing is that our retained earnings went up, retained earnings went down, and it changed by that balance. So that’s one of the things that were going to look at, in order to see what actually happened to the amount.

Then it says, “For additional entries, entries to the balance sheet account, other than cash, go to the T account.” So I’m going to do a journal entry here. Here, here, here.

Couple of rules, if there’s a debit or credit to a balance sheet account except cash, where are they? They’re in the T accounts. If there’s a debit or credit to cash, where does it go? Generally, investing or financing. If there’s a debit or credit to an income statement account, gain, loss. Where does that go? Operating activities.

So, let’s do it again. Entries to the balance sheet account, T account. Debit or credit to cash, would go in the appropriate side of the T account, or on the schedule, generally investing, financing. Debit or credit to income statement accounts, go to operating activities for the statement.

Step four, unreconciled differences on the T account should be eliminated, with the off setting debit or credit going to the appropriate section of your statement of cash flows. And then if you’re problem calls for the direct method, then you can go back, and do that as well.
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It says, “Direct method, complete the operating activities section of the statement, by using the income statement, and the related balance sheets. In all cases, complete the statement with sub totals for each section.” All right, so that’s what we’re going to do. I want to apply it now, in this class example.

So you’ll see here, and as I said, you can see a question like this, it could be a drag or drop, it could be a pop up screen, where you click on a box and it pops up. Either the debit’s or credits, and you have to pick which they are. Or it could be a dollar amount, so you have to pick which they are. So that’s what you need to think about.

All right, let’s read this through this question, and see what we got. It says, “The comparative balance sheet for Ruis Corporation at December 31, X1 and X0, is as follows: Ruis Corp, corporate balance sheet, December 31 X1X0.”

All right, so let’s start getting our brains kind of going. We start out cash. What is cash? That’s the whole statement of cash flows, right? That’s my operating activity, starts there and goes through. All right, so that’s cash. So we have 550 ending, 430 beginning, what’s the change in cash? $120,000, so cash went up by 120, so that’s my answer.

I’ve got short term investments, they went up, what is that? Investments? Investing. Accounts receivable affects what? Operating. Inventory, operating. Long term investments? Investments. Plant assets, fixed assets, PP&E? Investments. Accumulate appreciation, operating. All right, total assets. Liabilities, accounts payable, operating. Dividends payable, interest received, dividends received, interest paid, operating. Dividends paid, or dividends paid, financing, because they go to the owners. 

Short term bank debt, borrowed money, financing. Long term debt, financing. Common stock, $10 par, we’ll circle that, because we’re going to need that later. $10, that’s financing. APEG, financing. Retained earnings could be what? Could be operating, or it could be financing. Right, because retained earnings could be the change in cash, or it could also be you paid out a dividend, okay. 

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”The following initial transactions.” So, just get out brain going. “Net income was 790,” where’s that go? That’s a cash, net income would be the indirect method starting point, what does it close out into? Retained earnings, you hit the retained earnings T account. 

”A long term investment was sold for 135.” So, cash in, investment out. “Cash dividends were declared.” Dividends are what? Financing. “Building costing 600, was sold.” Debit cash, credit building. “Equipment costing 110 was acquired.” Debit equipment, outflow cash. What kind of activity? Investing, right, you’re buying a building, buying land, investing. 

”10,000 shares of stock were issued.” Cash, common stock, APEG, we learned that in stock holder’s equity. What kind of activity, money came in from issuing stock, what is it? Financing. “Prepare a statement of cash flows using the “indirect method, okay, and have a fabulous day.” 

All right, so what are my rules? My rules are, let’s first set up the statement of cash flows. So, you need a proper heading, statement of cash flows, Roger Co, for the year end of 12-31-X2 or whatever. Then, you’re going to have your operating activities. Operating activities. Then, I’m going to have a debit, credit, and a delta, for change. 

Then, we’re going to have, skip a lot, investing activities, and then the same debit, credit, change. Then I’ll have financing activities, debit, credit, change. Net increase in cash, which is my answer. Cash went up by how much? 120, plus beginning cash was 430, equals ending cash of 550. Okay, so notice the 120 is the answer.

We know the answer, we’ve got to figure out how much is operating, how much is investing, how much is financing, as a provider, provider, provider, provided use and so on. That’s what we need to figure out, we need debits and credits, and debits, and credits.

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So, first thing I’m going to do, is set up your answer schedules. Set this up, you know the answer is 120, these came right off of what? They’re full of bs, they came right off your bs, your balance sheet. There you go, mm-hmm, yeah, got to love it. That’s your balance sheet.

All right, second thing we need to do, and let’s look at our steps. “Step one, set up a statement of cash flows three column format, put in the cash. Set up a T account for every balance sheet account,” except what? Except cash. So let’s set up a T account for every balance sheet, except what? Cash and cash equivalents.

All right, so, let’s skip cash, the next one is what? Investments, short term investments. So we have investments, boom boom. What happened? It went up by $300, so that’s a debit. Remember, an asset goes up, it’s a debit. An asset goes down, it’s a credit, liability goes up, it’s a credit, liability goes down, it’s a debit. Stockholder’s equity goes up, it’s a credit, goes down, it’s a debit. You should know that, I hope, by this point in the course.

Accounts receivable, no change. You know what, I don’t know if that’s reasonable, but I’m going to put it in anyway. Because maybe there’s a debit that offsets a credit, and they balance out to zero, but I’ll set it up anyway.

Next one is inventory, went up by 80. Went up by 80, that would be a debit of 80. Hm, my fan’s off. Long term investments, let’s see, long term investments went down by 100. Credit 100. Next item, plant assets PP&E. Now PP&E went up by $700, that’s a debit.

Next one, accumulated appreciation. Now, accumulated appreciation had no change, is that reasonable? No, because if all your assets are full depreciated, you may be a going concern doubt, right? You want to have some kind of depreciation, but maybe, we depreciated the exact same amount that we sold, when we offset each other. Maybe we’ll have to look into that. All right, accumulated depreciation.

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Now, next one is what? Accounts payable, accounts payable went down by five, but you know what, let’s put a little squiggly here, because now we’re looking at the liabilities. So if a liability goes up, it’s a credit. If it goes down, it’s a debit. This went down, it’s a debit, accounts payable.

Next one is dividends payable, and dividends payable went up by 160. We’ve got short term debt. Short term debt went up by, short term bank debt, 325. We have long term debt, went up by 110. Then, we have common stock, and we just covered that in stockholder’s equity, an additional paid in capital. Okay, now, common stock went up by 100, and APEG by 120.

Now generally, in these cash flow questions, journal entry debit cash, credit common stock 100, APEG 120, debit cash 220. Right, that’s usually what happens, but well figure it out later. And finally retained earnings, let’s see what happened. Retained earnings went up by 290, okay.

So, step one, set up your answer sheet. Let’s run over here, we’ll be doing a lot of running, so stay with me, woo. Step one, set up your answer sheet. Operating, investing, financing, put in the change in cash, plus beginning, plus end. You know the ending, boom. So 120, that’s our answer, we know it’s true.

Now, come over here and set up a T account for every balance sheet account, except what? Cash and cash equivalents. Okay, so we’re going to set up a T account for every balance sheet except cash and cash equivalents.

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You want to put, if it’s an asset, if it went up, if it’s a debit, if it went down, it’s a credit. Liabilities or equity go up, it’s a credit, goes, down, it’s a debit. Okay, I put a squiggly here, to distinguish between the two.

Balance sheets are supposed to what, balance. Now careful, because if you put something on the wrong side, what do you assume? If this is a debit, I assume my body equipment cash went out. If it’s a credit, I assume I sold it, cash came in. So it’s imperative that you put the debits and credits on the right side.

How do you check? Let’s check it, let’s do our debits versus our credits. All right, so help me out, let’s do some addition. Ready, 300– I’m doing the debits only. Plus 80, that’s 1080, and 5 is 1085, and no more credits, or no more debits, 1085.

All right, let’s see what we got. Credits, 100, 260. 585, 695, 795, 895. 895, 905, 915, 1115, 1205. Huh, what’s the difference between 1085? It should be 120, which is cash, because we didn’t set up a T account for cash, shut up, that’s good.

So let’s come on over here, the Michael Jackson, woo. Notice this is our T account for cash, there’s your 120. Okay, I can handle that. So, yes it balances. What if they didn’t balance, what if we were off by some money? Then you can assume, if I’m off by 10, maybe this one’s on the wrong side or something.

So if you’re off, maybe cut it, divide it by two, multiply it by two, to see if one of these numbers went on the wrong side. But your debits and credits should balance, other than that balance for cash, so you got to make sure you do that.

So step one, set up your answer sheet. Step two, set up a T account for every balance sheet account except cash. Step three, it says here, “Analyze the additional information for the transactions post debits and credits, begin with net income.”
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What do you do with net income? Your net income was 790. So what does that mean? It means more money came in. So right here, I’ll start in the indirect method, net income. Debit, 790. Now, where does the off set go? Debit, net income, credit, retained earnings. That would go over here, 790.

Now look, I’m going to need 290, but I’ve got 7. Changes are, I’m going to need a $500 debit. Why would you reduce retained earnings, why would you debit retained earnings, when you declare a dividend? Hm, we’ll figure that out later.

So step one, set up your answer sheet. Step two, set up a T account. Step three, find net income. Put the offset to retained earnings.

Now, step four, go through the additional information, set up the journal entries. We’re going to set all the journal entries up here. If there’s a debit or credit to a balance sheet account except cash, it goes here. If there’s a debit or credit to cash, it goes to the statement of cash flows. If there’s a debit or credit to income, here’s income, we’ll reconcile it here, in the operating activities section. Unless you know that it goes somewhere else, but generally it’s here.

Step one, step two, step three, pretty easy, let’s do it. All right, first bullet, net income was 790, we just did that, right? Debit cash, boom, credit, retained earnings, over there.

Next item, “A long term investment was sold for 135, there were no other transactions affect long term investments, all of the investments are classified as available for sale.” So, look at the investment T account. The investment T account, it says long term investment, on your balance sheet, it says $100 change. So, I’m going to debit cash, because it was sold for 135, I’m going to credit long term investment for 100, and I’m going to have a gain of 35.

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Okay, so, what we need to do is say, “Okay, well what happened here?” What happened here, is we sold this long term investment, and we must have gotten some cash. So, what are the rules? Debit or credit to a balance sheet account except cash. That’s this, goes over here.

So I’m looking for a credit of 100, I found a credit of 100, I’m done with the T account. It’s not the balance, what is it? Ch-ch-ch-changes. It’s a change, okay? Second rule, debit or credit to cash. What caused this transaction a sale of an investment. What kind of activity investing, so where does this cash go? Under investing, so I’m just going to call it here, Proceeds Sale Long Term Investment. And it’s a debit, inflow, 135. So I just found 790 of the 120, 135 of the 120, those are both debits, inflows.

What’s this next item? Debit or credit to an income statement account, goes up here. So I’m going to call it Gain On Sale Of Investment. Now, I’m crediting 35, let’s think about it. Here’s 790, why am I backing out 35, anybody. Hm, why?

Well, how much did this investment cost me? It cost me 100, and I made $35 gain. Isn’t the $35 gain already included in this number? Uh huh, isn’t the $35 gain already included in this number from the income statement? Uh huh, didn’t I just double count the gain? Yes, so you better back it out.

Huh? One more time. This number is net income, bottom line of the income statement, which includes a $35 gain. This cash proceeds is $135, it includes 100 cost, in cost out, plus a $35 gain. So the gain’s already in here, and the gain’s already in here, I double counted, back it out. Makes sense.

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All right, let’s go on to the next bullet. It says, “Cash dividends of $500 were declared.” We learned this in stockholder’s equity. Journal entry, debit retained earnings. And it was how much, 500. Credit, dividends payable. Okay, so what kind of account is dividends payable? Balance sheet account. What kind of account is retained earnings? Balance sheet account.

So let’s come over and look for them. Looking for retained earnings, debit 500, this minus this, done. Dividends payable, here it is. I just did what, I just credited it for 500. Now, I only want it to go up by 160, that means I’m going to need a debit later. What do you think’s going to happen during the year? If they don’t tell me, I’ll have to figure it out. Chances are, I might have paid off the dividend, at least 340 bucks of it. Huh, but we’ll figure that out in a minute.

Next bullet, “Building costing 600, and having a carrying amount of 350, was sold for 350.” So, building costing 600. So, we’re going to get rid of PP&E, we’re going to debit cash, we’re going to debit accumulated depreciation, and we’re going to have a gain or a loss. Make sense, mm-hmm.

Okay, so let’s read it carefully. “Building costing 6, having a carrying amount of 350 was sold for 350.” So, how much cash? 350. What is the book value? Book value is cost net of accumulated depreciation. So, they are telling me, that which number goes where.

Let’s see, are they saying that I should put 350 here? It says the book value carrying amount was 350. That goes here, my carrying value is 350, that means that this must be 250, that’s 6 and 6, that means zero gains, zero—

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Oh, so here’s the trick. If you were to put the 350 here, you would’ve thought you had a big gain, 100 bucks. But they said the book value, or carrying value was 350, that means cost, net of accumulated depreciation is this, that’s the number you plug.

Okay, so journal entries, debit or credit to a balance sheet account, PP&E, and accumulated. So, PP&E, its a credit here, it’s a credit here. So, I’m looking for a net debit. Wow, I’m going to have to buy a lot more later. Accumulated depreciation is a debit. Wait a sec, I thought there was no change. So guess what, if they don’t tell you anything, I bet debit depreciation expense, credit accumulated. That’s what’s missing, but we’ll figure it out.

What’s the other thing? Got that, done, got that, done. Oh, debit or credit to cash. You know the rules. What kind of activity is the purchaser sale of the equipment, it is a what? Investing activity, so let’s come over here, what do we call it? We’ll say, Proceeds Sale of PP&E. Inflow, 350. All right, because that’s an investing activity.

All right, next item, equipment costing 110 was acquired to the issuance of a long term debt. So we got equipment, 110, PP&E. Credit long term debt, 110. Notice, did I touch the word cash? No, what kind of activity is this? Non cash. Where does it go? Supplementary schedule. But, you still have to cross out the accounts.

So, I’m looking for equipment. Here’s a debit of 110, PP&E, power plant equipment. Over here, I got– Here’s long term debt, 110, I’m done with that. So, as I finish off the T accounts, I crossed them out, so I know I’m done with them.

All right, next item, “10,000 shared of common stock were issued at 22 bucks a share.” All right, this shouldn’t be bad. So, debit cash, credit common stock, additional paid in capital from common. We learned that in stock holder’s equity, but they’re probably not asking that you distinguish between APEG, common APEG, referred APEG treasury and so on.

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So, credit common stock always for how much par. So, 10,000 shares at $10 par, how do I know 10? Look at the balance sheet, common stock $10 par, that’s 100,000. APEG is the difference of 10 and 22, which is 12, times 10,000 which is 120, and this is 220. Remember as I said, generally, common stock APEG over here, common stock 100, looking for 100, bye bye bye. Looking for 120, bye bye bye.

Gone, now what kind of activity is the issuance of stock, that would be a way to get money into the company, we call that a financing activity. So we got 220 in, I’ll say, Proceeds Issuance Of Common Stock. How much? Debit, 220. All right, so, oops, that’s it for the item.

So what are the rules? Step one, set up your statement of cash flows. Find net income, put the offset to retained earnings. Step two, set up a T account for every balance sheet account except what? Except cash and cash equivalent. Set up a T account for every balance sheet account except cash and cash equivalents, add them up, make sure the debits and credits are on the right side. Step three, come to the additional information do the journal entries.

Three rules, debit or credit to a balance sheet account go to the T account. Debit or credit to an income statement account, goes over here, on the income. Debit or credit to cash, goes on the statement of cash flows. Perfect, all right, so we just did all that.

Now, let’s look back and see what we do. Hm, what’s the next step? “Any unreconciled differences,” step four, in T account balance sheet, T account should be eliminated, with the off set debit or credit going to the appropriate section of the statement of cash flows.”

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So it should go to the proper section of the statement of cash flows. Okay, so that’s what we need to do, is figure out where on the statement of cash flows it goes. All right, and that’s what we’re going to have to look at. So, what’s still open? Investment went up by 300. Now here’s the deal, they didn’t tell me what happened here.

So to close it out, what do I need? Basically, to get an X like this, I need a number above it. So, since they didn’t tell me what happened, you have to create it. So let’s assume we debited investment, by 300, what happened? Well, they didn’t tell me, assume you spent cash. Okay, but we won’t just say cash, cash, cash, because everything on the statement of cash flows is cash, so what we’ll say is increase in investment, and that’s an out flow.

So let’s come back over here, and we’re going to say, increase– Or not increase, let’s say acquisition of investment, increase of investment, outflow credit, 300 bucks. So that’s all we’re going to do. The next thing, AR, had no change, we’ll just assume that’s right.

The next one is inventory went up. If it’s a debit here, it’s a credit there. Inventory went up, you must’ve done what? Spent money, so that’s an outflow. It’s a debit here, it’s a credit to cash.

So what are we going to call it over here? Acquisition of inventory, and it goes into operating, because you know acquisition of inventory. You know, that acquiring inventory, is what? Oops, I erased this my accident. Gain, what was that, 35. Acquisition of inventory is what? Is an outflow of money, so in this case, I must’ve spent 80 bucks cash. Why? Because you know part of this cost of goods sold wasn’t paid for, boom, 80, inventory went up, I must’ve spent money.

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All right, coming back over here, gone. What do I need here, PP&E, I need a big number here. 6 and 7 is 13, minus 11. 13 minus 1 is 12, minus 100 is 1190. So I need debit, PP&E, credit cash, but we don’t call it cash, we say acquisition of PP&E. That’s an outflow, 1190. So back here, we know it’s an investing activity. Acquisition of PP&E, or investing in yourself, 1190, beautiful.

Next one, done, here we go, you know what they didn’t tell me? Why would you credit accumulated? Well, probably because you debit depreciation expense. Now, it’s a credit here, it’s a debit over here.

Now, what kind of activity is depreciation expense? Depreciation expense would go up in operating, and it’s a debit. Anybody, why am I adding back 250? Because I started with net income, on the income statement, this was a reduction. Guess what, wasn’t a cash outflow, I still have the money, add it back. Like that.

Next item, oop, accounts payable, five so it’s a five, I need a debit here, it’s a credit there. Payable, as you know, is from operating. So it’s a payables went down, so it’s a debit there, it’s a credit here, decrease in AP. All right, why am I crediting decrease at AP? Why am I hitting that for five? I don’t know, but it works, right? Just kidding.

So what do we do? if it’s a credit there, it’s a debit here, if it’s a debit here, it’s a credit. So, payables went down, guess what? That means that I paid off everything that I bought, plus last year’s payables of five bucks, so I have five dollars less than I think on my income statement, back it out. Five dollar, five dollar, five dollar sub sandwiches, right, isn’t that a commercial? Anyway, take it out.

Next item, oh here it is. I got dividends payable, boom, I must have 340, 500 minus 340 is 160. Debit dividends payable, credit what, cash.

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So what is this, payment of dividends to shareholders. What kind of activity is that, when you pay a dividend? It is a cost to the owners, it is financing activity. So, payment of dividends, outlfow, what? Outflow 340, beautiful.

Next item, so we’re done with that one. Here we go, short term debt. So credit 325, I must debit cash. So, short term debt, that means I must have borrowed money, money must come into the company. So proceeds from short term debt. And that’s going to be an inflow of 325, very nice.

Coming back over here, let’s see. We’re done done done. Everything’s done, let’s review. Step one, set up your answer sheet. Step two, set up a T account for every balance sheet account, except cash. Then add them together, make sure they look right. Step three, find net income, put the offset to retained earnings, which we did here, net income. Step four, go through all the journal entries. Recreate all the journal entries, put them here.

Three rules, debit or credit to a balance sheet account except cash, T account. Debit or credit to cash, statement of cash flows. Debit or credit to income, operating activities.

All right, step five, whatever’s left, what do you do? Go back and close everything on the balance sheet, because you got to account for all the ch-ch-ch-changes on the balance sheet, that’s what we just did.

Then, step six basically says add it all up, and pffft have a cocktail, cocktails. All right, so we’ve got 790, 35, 80, 250, 5, I’ve got debits of 1040, credits of 120, which gives me 920 positive. What do I call that? Net Cash Provided by operating activities, 920.

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I’ve got 135, 350, 485. Here, I’ve got 1190 and 3, which is 1490, different is 1005 negative. What is this called? Net Cash Used by investing activities.

Next one, I got 220 and 325, 545. I’ve got 340, 340, difference is 205. So, 920 minus 105, plus 205 better be 120, which we knew 31 minutes okay, okay? So 30 minutes ago, we knew this was 120, all we had to do was figure out how the heck to get here. Notice, this is operating activities, investing activities, financing activities, and the answer. You’ll see the solution in your notes, in a much more legible format.

And I love to impress upon my students, guess what, I have the worst penmanship known to mankind. And guess what, they still pass me. And this was when it wasn’t computerized age, they had to read my scratch notes. They had to read my blue book. Guess what, if I could get through the exam, with this ugly, scary writing, you can get through the exam, but you need to master a question like this.

So what I want to make sure you do, is you got through this question again, and you practice this question, because I want to be reasonably assured that you understand the concepts, and that you can get through the question.

You’ll also see that I included some questions in the class questions, so you can practice with those, because it’s really important that you practice with those questions, that you understand the multiple choice, that you also understand the simulations as well, okay? Very important. In a minute, we’ll talk about this under IFRS.