Page 650 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

Retained earnings 30,000 (9) 4,000 (1) 10,000 36,000
Totals 110,000 51,000 51,000 147,000
Cash flows from
operating activities
Net income (1) 10,000
Increase in (2) 10,000
accounts receivable
Decrease in (3) 4,000
merchandise
inventory
Decrease in (4) 6,000
accounts payable
Increase in (5) 2,000
accrued liabilities
payable
Depreciation (6) 5,000
expense
Cash flows from
investing activities:
Purchase of (7) 20,000
equipment
Cash flows from
financing activities:
Proceeds from (8) 30,000
issuing common
stock
Payment of cash (9) 4,000
dividends
Increase in cash for (0) 11,000
year
51,000 51,000
Accumulated Depreciation - Equipment
Beg. Bal. 5,000
(6) 5,000
End. Bal. 10,000
Exhibit 132: Working paper for statement of cash flows
Entry 7 We debit the Equipment account and credit "Purchase of Equipment" in the investing activities section
for the USD 20,000 cash spent to acquire new plant assets (equipment).
Entry 8 We show the USD 30,000 cash received from sale of common stock as a financing activity. The entry
also explains the change in the Common Stock account. If stock had been sold for more than its stated value of USD
50 per share, we would record the excess in a separate Paid-In Capital in Excess of Stated Value account. However,
we would report the total amount of cash received from the issuance of common stock as a single figure on the
statement of cash flows. Only this total amount received is significant to creditors and other users of the financial

statements trying to judge the solvency of the company.
Entry 9 We debit Retained Earnings and credit Payment of Cash Dividends for the USD 4,000 dividends
declared and paid. The entry also completes the following explanation of the change in Retained Earnings. Notice
that on the statement of cash flows, the dividends must be paid to be included as a cash outflow from financing
activities.
Retained earnings
Beg. 30,000
Bal.
(9) 4,000 (1) 10,000
End. 36,000
Bal.
Using the data in the lower section of the working paper, we would prepare the statement of cash flows under
the indirect method shown in Exhibit 130 (Part B).

651