Hello, how are you all? Everybody is studiously working right now,
and that is okay. You guys go ahead and keep filling those things
out while I'm talking. Okay, show this on the screen if you would. What I have here is we are not having a quiz
today over the classification of cash flows. But I wanted to do this practice quiz. Actually, let's just back up a little bit. If you would show these slides here, okay? We talked about the introduction to the cash
flow statement last time, and what it does. Then we talked about how there are three very
important sections of the cash flow statement. There's the operating section that shows operating
activities, the investing section that shows the investing activities, and the financing
that shows the financing activities. The key thing is to be able to look at a cash
flow and know what type of cash flow it is. Is this an operating cash flow? Is this an investing cash flow? Is this a financing cash flow? All right? And I gave you the examples, oops, there's
my writing still, of operating cash flows are those things that happen in the daily
operations of business, they're very repetitive, okay? Then I gave you the three most common investing
cash flows, and the three most common financing cash flows.
And I talked about how investing cash flows
have to do with long-term items on the left side of the accounting equation, okay? These are all long-term assets. And I talked about how financing cash flows
have to do with long-term items on the right side of the accounting equation, is that correct? Now it's very important to know that. Now, going back to this, what I wanted you
to all do was take this as a practice quiz. We're not gonna go over the answers now.
You folks at home, this should be in your
handout packet, but the answers are down below, okay? The answers are down below. So sometime, you don't have to do it now,
because there's actually something we need to talk about before you do it for you folks
at home, you guys here can play with it a little bit. But you can come off of that. This is always an area that people think they
understand, and they don't, okay? As I said last period, you can't construct
a balance sheet if you don't know whether you put a certain account in the asset, the
liability, or the equity section. Or you can't do a meaningful cash flow statement
if you don't know whether to put a certain cash flow in the operating, investing, or
financing section, okay? Now, there's one more category that I want
to talk about, and I intentionally did not talk about it last time, okay? And that is this section right here. There are some transactions that do not have
any cash flow. No cash inflow, no cash outflow. But they're significant enough that we have
to actually disclose them in a footnote to the cash flow statement, okay? Examples of this would be, let's say we owed
somebody, let's say we owed a bank $100,000 in debt.
And we talked to the bank, and we agreed they
would forgive our debt if we gave them 35,000 shares of our stock. That is a significant transaction that just
occurred, but note, there was no cash that changed hands, was there? Okay? Another example in looking at the slide, conversion
of preferred stock to common stock. Or, let's say you buy a piece of land, and
it's entirely on credit. Well what would that journal entry look like? You would debit land, and you would credit
long-term notes payable, right? There's no cash being increased or decreased. But these are significant enough transactions
that even though they do not require cash flows, you have to disclose them on a footnote
to the cash flow statement if they're material.
Now if they're not material, if you buy a
computer monitor for $200 on credit, that's not material enough. But if it's a major transaction, you have
to disclose it. The main reason they have this rule is, they
don't want you to try to construct transactions that don't involve cash so that you can kind
of obscure them from the readers, so you can hide them from the readers. Does that make sense? So, this is another category that you should
be aware of, okay? Now, if you go to this practice handout again,
I actually have a few non-cash transactions in there. And like I said, the answers are at the bottom,
okay? The answers are at the bottom, but I don't
want you to look at those, okay? So our quiz, folks, will be next period. You with me? At the very beginning of next period. But students always think they know this,
"Oh, I think I have the classification cash flows down great." And then I want you to do this, and if you
get these all right, well then you do have them down.
But if you miss six, or five, or four, or
more, you don't have them down. That make sense? Okay, all right. Okay. What I wanted to do now, oh, and I also, I
emailed you, last period I gave you some basic, basic flash cards to learn, didn't I? And I think there were just two pages of them,
right? They were overall broad categories. I also have some more specific advanced flash
cards that you can use if you want, okay? Did you see that I emailed that to you guys? I don't print those out because it's five
pages, and some people aren't gonna use them anyway. For you folks at home, you'll either have
those in your handouts, or just tell me and I'll email those to you. But those are the advanced flash cards, they're
a little bit more specific.
So instead of saying buying or selling a fixed
asset, and have that be one flash card in the basics, the advanced, you might have several. Sell a truck, buy a parcel of land, you know,
purchase a vehicle. I get more specific, does that make sense? So there's obviously more of them. But if you can have those advanced cash flows,
advanced flash cards for cash flows down, then you're in pretty good shape. Those should be waiting in your email box,
okay? Cool? All right, let me see my notes here, make
sure I cover everything I want to do. Okay, I want to show you one thing real quick.
You don't have to turn in your books if you
don't want to, folks, but this is on page 655 in the textbook, okay? I want you to note that this is a cash flow
statement, okay? This is a cash flow statement. And I want you to notice that it is, I'm trying
to get the glare off there, there are three sections, operating, investing, and financing,
just like I told you, right? And look at the amounts that they arrive at.
The cash in regards to operating activities
is $79,725. For investing it's negative $3,525, and for
financing it's negative $57,075, okay? Now if it's a positive number we say it's
net cash provided by that activity. If it's a negative number we say it's net
cash used in that activity, okay? Now, there's three sections, and these are
the three numbers, right? If you look at the next page, they have a
similar cash flow statement, and it also has three sections, operating, investing, and
financing. And they arrive at the same three numbers. So what is the difference between these two
cash flow statements? Well this cash flow statement on page 656,
this is constructed using the direct method. The difference between the direct method and
the indirect method is just how they arrive at this number right here, okay? Look at this one, $79,725.
Look at the previous page, again it's $79,725,
but the way they arrived at that operating cash flow number is different. Do you see that? The bottom half is exactly the same between
both of these statements. This is called the indirect method, the way
they arrived at the $79,725 on page 655. This is the direct method. They arrive at the same number, it's just
done in a different way. Do you see that? Okay, keep that in mind as we go through these
next slides, okay? There's two acceptable methods to determining
your cash flows from operating activities, okay? There's two acceptable methods to determining
cash flows from operating activities. There's the direct and there's the indirect,
I just showed you that, right? But in my class you're only responsible for
learning the indirect method. And why is that? Because almost everybody uses the indirect
method. I hardly ever see the direct method.
I can't remember the last time I saw the direct
method used. So, remember, the only way that those two
differ is how they arrive at the operating cash flows number. They both arrive at the same number, but you
only have to learn the indirect method in my class. So what we are going to do today, the task
before us, is we are going to learn the indirect method for preparing the cash flows from operating
activities. The cash flows from operating activities section,
okay? So what we are going to do is, we're gonna
learn this section right here, okay? Right here. That's how we're gonna learn today. Now, if you do what I ask you to do, you will
learn it well. But if you take shortcuts it's gonna be harder,
okay? I know how to teach this section, so listen
to me, okay? We're gonna concentrate on this slide right
here. Now, let me explain this slide. Well first of all, let me ask you two questions.
We've got net income right here, correct? What financial statement do we pull net income
off of? Yes? That should be an easy one. The net income comes off the income statement. Is that correct? Now, the income statement, is that prepared
on the accrual basis of accounting, or on the cash basis of accounting? >>Accrual basis. >>That is correct. It is prepared on the accrual basis of accounting,
okay? So what we are going to do, we have this net
income number that we pulled off of the income statement, which was prepared on the accrual
basis. We are going to do three sets of changes to
that number, okay? The first thing we're gonna do is, we're going
to deal with our non-cash expenses. Then what we're gonna do is we're gonna deal
with our losses and gains. And then what we're gonna do is we're gonna
deal with our changes in our current assets and current liabilities.
Now once we do these three things to it, what
we're going to get is a new number, and that will be our cash flows from operating activities. Are you with me? In a way, think of this cash flow from operating
activities at this point in your learning. In a way, think of this cash flows from operating
activities similar to the net income if we would have not used the accrual basis of accounting,
but rather the cash basis of accounting, okay? Let me say that again. I want you to think of this cash flows from
operating activities as the net income number, if we would have used the cash basis of accounting
rather than the accrual basis, okay? Now we're starting off with net income from
the income statement, which is on the accrual basis, but we're gonna do these three things
to it, and on the other side's gonna be this number right here. Now we're not just interested in calculating
the number alone, we want to show how we arrived at that number.
Does that make sense? So, what we're gonna do is this. The first thing we're gonna do is deal with
non-cash expenses. Non-cash expenses. Well, what the heck is a non-cash expense? Well, let's talk about that. Okay? Let me go over to the ELMO, okay? We have an income statement, right, for a
certain period of time. And we know that this was prepared on the
accrual basis, right? And you know how an income statement looks,
right? You have your revenues, you know, different
revenues listed. You have your expenses, have different expenses
listed, right? And then, at some point down here, you have,
let's say revenues were greater than expenses, and so we have a net income number. Let's just make it an easy number.
Let's say net income was $100,000 for this
period. Are you with me? So that net income of $100,000 was arrived
at using the accrual method of accounting, okay? However, there were some expenses, perhaps,
in here, that were what we call non-cash expenses. For example, let's say that we had depreciation
expense, and let's say that it was $2,000, okay? So I want you to understand, this net income
number of $100,000, one of the expenses deducted in arriving at it was this depreciation expense
of $2,000. Understand? But I want you to think about that.
Come off that for a second. Did we really have a $2,000 cash outflow for
that depreciation? Can you look at a check that we wrote for
$2,000 for our depreciation? You see what I'm saying? It is what we call a non-cash expense. It was an expense on the income statement,
and it was deducted in arriving at net income, but there was really no cash outflow. It is a non-cash expense. Understand? So what we have to do, what we have to do,
we want to calculate our cash flows from operating activities, okay? We want to come up with that number. Well, what we're gonna have to do in this
case is, we're gonna have to take the net income, and in this case how much was the
net income? $100,000.
And we're going to have to add back this depreciation
expense of $2,000. Why do we add it back? Because it was deducted in arriving at that
number. By us adding it back we're negating the fact
that that occurred. Does that make sense? It's a non-cash expense. It was deducted in arriving at this, but since
it's not a cash outflow we're going to add it back in trying to arrive at our cash flow
from operating activities, okay? Now, we do not do this with all expenses. We only do this with our non-cash expenses. And there are four non-cash expenses that
we will deal with.
The first of them I just told you, depreciation,
that is a non-cash expense. Does anybody want to make a guess on what. >>Amortization. >>Yes, amortization. And what's the other expense that's related
to depreciation and amortization? >>Depletion. >>Very good, depletion. Now, let's remind ourselves what these are. These are all spreading out the expense over
a reasonable amount of time to abide by the matching principal, right? Depreciation is in regards to fixed assets. Depletion is in regards to natural resources. And amortization is in regards to intangible
assets. But if you see one of these expenses on the
income statement, you need to add it back in the manner that we did. There's one more non-cash expense, what that
is is it's bad debt expense, if we use the allowance method.
Do you remember the allowance method of estimating
bad debt expense in Chapter 9 of Accounting I, Accounts Receivable? We estimate the bad debt expense, right? And that bad debt expense shows up on our
income statement, and it's deducted in arriving at net income, but there was not a cash outflow
for that bad debt expense. You with me? Okay? So, those are our four non-cash expenses. Now we don't add back all of our expenses
though, folks. If you have salaries expense, it was deducted
in arriving at this net income, and we are okay with that.
We do not add back salaries expense, for example. We only add back our four non-cash expenses. You with me? So what we are going to do now, and I want
to show you what I want you to do, and I'm gonna show you what I don't want you to do. You should have this handout right here, okay? And each of these situations is totally separate
from the other, but in each of these situations we're going to calculate the cash flows from
operating activities. Now, let's do the very first one together. Okay, situation number one. Net income is $500, and depreciation is $39. Okay, what is our cash flow from operating
activities? What's the answer? >>$539. >>It's $539. Okay, but I don't want you just to put $539
here. Here's what I want you to do. I want you to say net income is $500, plus
depreciation expense that we add back of $39, okay? Here's the deal. If you do what I'm asking you to do, you're
going to learn without even knowing it, you're going to learn how to do a cash flow statement.
If you just try to get lazy and just put the
answer there, or just put the numbers there and don't label them, you're not going to
be learning what the objective of this whole day really is, okay? You're gonna have computed numbers, but you're
not gonna know how to prepare a cash flow statement. And our objective is to learn how to prepare
a cash flow statement. So don't be lazy, don't just put the number. Write this out right here, okay? What I want you to do as they play the music
is, I want you to do numbers one through five. One through five of this. And I'm going to, you might have this, folks
at home, in your handout, but here are the check figures for numbers, well actually all
of them.
But you can see specifically for now the check
figures of one through five. So let's play that music, and let's do one
through five, and then we'll go over them. (music)
Okay, let's take a look at those answers. You had the check figures, right? Okay, so here are the answers. Now don't just give me that, okay? Give me that, okay? Notice on number four I called that net cash
used by operating activities. Now if you, on the test, would have accidentally
said net cash flows from operating activities, even though it's a negative number, I would
not have subtracted points from it. But that is the answers of one through five. Now I gave you some cash expenses, did I not? Okay? So, don't add those back, just add back the
non-cash expenses. Any questions on any of those, folks? No? Okay, hop back over to the computer. We just did this category right here, right? Now what we're going to do is we are going
to deal with losses and gains, okay? We're gonna deal with losses and gains.
Let me give you a little scenario, okay? Let's say that, let's say we have a truck
in our business. And let's say that the truck had cost originally
$50,000, okay? And let's say that the accumulated depreciation
on that was, let's say it's $47,000. So the book value of that truck is $3,000,
would you agree? Maybe that was our estimated salvage value,
so maybe we depreciated it down to where the book value equals the estimated salvage value,
okay? Well, this is our situation. We're driving this truck on the highway, and
all of a sudden it starts smoking and making bad noises, it won't run. We pull over on the highway, something's wrong
with our truck.
We have it towed into the shop, the guy calls
us and said, "Hey, I looked at your truck, bad news. This thing's in bad shape. Bad, bad, bad shape. It's gonna take a lot of money to get this
thing fixed." So, you opt to just, it's been a good truck,
but it's just, it's not worth fixing. So what you do is you don't even sell the
truck, you just give it to charity. Have you ever done that? I did that with a van once, I gave it to charity,
have fun with it, okay? So our business, we donate this truck to charity,
okay? Now, let's prepare the journal entry to remove
that truck from our books.
Okay, well we would have to credit truck for
$50,000, right? We would also have to remove the related accumulated
depreciation from the book. Now this is all review from Accounting I,
hopefully. You remember doing this? You remove the truck, you remove the accumulated
depreciation. Truck is a debit balance account, so we have
to credit it to take it off the books. Accumulated depreciations is a credit balance
account, so we have to debit it to take it off the books. This journal entry does not balance. So what do we debit for $3,000? >>Loss on disposal. >>Loss on disposal. Now we've talked about losses and gains before,
I think most recently in Chapter 15 on Investments.
What are losses? Losses are kind of like expenses. They're debit balance accounts, they're temporary
accounts. They're on the income statement. They're deducted in arriving at net income. Gains are kind of like revenues. They're temporary accounts with normal credit
balances. They're on the income statement. Gains are added in arriving at net income,
correct? So this loss, going back to our income statement
we looked at a little while ago, this loss might have been listed down here at $3,000,
loss from disposal. And that was deducted in arriving at this
net income, this loss was. Do you see what I'm saying? But think back to that story about the truck. Was there a $3,000 cash outlay there? No, there was not, was there? And yet that loss was deducted in arriving
at this number. So what we have to do here is, we have to,
now I can't find my original piece of paper, but we have to add it back to net income,
okay? Remember how I had net income of $100,000,
and then we added the depreciation expense of $2,000? Now I'm going to add back our loss from disposal
of $3,000 in arriving at this cash flows from operating.
Are you with me? So look at this slide. Some people are going, "I think you made a
mistake on this slide, Dave. You say to add the losses and subtract the
gains. Don't you mean subtract losses and add gains?" No, I do not mean that. We add back the losses because they were subtracted
in arriving at net income, and we want to negate their affect. We subtract the gains because those gains
were originally added in arriving at net income.
Let me say that again. Losses were originally subtracted in arriving
at net income, so we have to add them back. Gains were originally added, so we have to
subtract them out, okay? >>What about the depreciation from the truck? Do you do anything with that? >>Well, if there's depreciation expense on
the income statement we would add it back like we did, but we would not look at the
accumulated depreciation account, we would look at depreciation expense, okay? Good question. Okay, what I want you to do now is numbers
six through ten. Numbers six through ten on your handout, okay? And you have the check figures, I'll put them
up again here in a second. You should have those in your packet, folks
at home.
And let's do six through ten, and go ahead
and write out your work. Continue to write out your work, and we're
gonna build on what we learned with non-cash expenses, and now we're gonna deal with gains
and losses. So let's do six through ten as they play that
music. (music)
All right, take a look. Just show me that, show me that, okay? Did you guys get these answers? We're kind of just building on the knowledge
that we've gained this period, aren't we, okay? So are there any questions on any of those? Any questions on any of those? Take a look at them, you can see how I arrived
at them.
It's extremely easy to make a silly mistake
in these, isn't it? It's very easy to make a dumb mistake, I won't
say dumb mistake, that's a little harsh. There's a lot of little errors that you could
easily make, correct? All right? Okay, no questions on six through ten? Okay, let's go back to the computer. We've handled these first two categories. The last one we're going to deal with is,
we're going to analyze the changes in current assets and current liabilities, okay? Now we're only gonna deal with current assets
and current liabilities. Now we might need to refresh ourself, what
are current assets and current liabilities? Well, current assets, current items are those
expected to come due, both collected and owed, within one year.
Remember we have current assets, and we have
current liabilities, and then we also have noncurrent assets and noncurrent liabilities? We're only dealing in this step with the current
assets and current liabilities, okay? As a reminder, and I think you have this in
a handout, these are your current assets and current liabilities. You need to learn these. You use this so much in your business education. You need to know the current assets, and they're
listed there, I'm not gonna read them to you, you can read. You need to know your current liabilities,
those are also listed there, okay? I promise you I will have a test question
where I list out different assets and liabilities, and you have to tell me if they're current
or noncurrent.
I promise you. I promise you, I promise you, I promise you,
'cause you need to know these. I just told my Accounting I class the same
thing, we're in Chapter 4, okay? But what we're going to do is, we are going
to analyze the change in our current assets and current liabilities. And we are going to deal with the change according
to this chart, which you also need to know. Let me tell you how we're going to do that. Let me give you an example. Let's say that we are looking at our balance
sheet, okay? And this is the beginning of the year balance,
and this is the end of they year balance, okay? So let's take accounts receivable, for example. Let's say accounts receivable, at the beginning
of the year, was $32,000, and at the end of the year it's $31,500. It's decreased by $500. Well, how would we deal with a decrease in
accounts receivable from $32,000 to $31,500? Well, let's look at the chart. This is a current asset, and it decreased,
so we are going to add it to net income, okay? We're going to add it to net income as I'm
gonna show you right here.
We are going to say plus our decrease in accounts
receivable, and how much was it? $500? 'Cause think about it, if your accounts receivable
decreased, chances are what happened? >>You got $500. >>You got cash inflow of $500, okay? Let's do another one. Let's say down in the liabilities section
we have accounts payable, and it was $12,000 at the beginning of the year, and now it's
gone down to $11,000. Okay, well that is a decrease from $12,000
to $11,000 of a current liability, right? So what does our chart say to do? A decrease in a current liability, we should
do what? >>Subtract. >>Subtract it from net income. So what we would do is, we would say, how
much did it change by, $1,000? We would say minus decrease in accounts payable. I'll use parentheses to show a subtraction. Does that make sense? Now listen folks, we do not analyze all changes
in all assets and liabilities. So if I give you like an account called land,
or bonds payable, those are long-term accounts. We do not account for them in this manner,
okay? This is just for current assets and current
liabilities.
We also, even though cash is a current asset,
we do not analyze the change in cash in this section right here, because you're gonna find
that the whole cash flow statement is an analysis of the change in cash. Are you with me? So you gotta learn your current assets and
your current liabilities so that you can follow this chart, okay? Now we're not gonna have time to do the rest
of the handout, but let's at least do a few of them. Let's at least see if we can get through the
first couple. So let's start working on 11 through 20 of
your handout while they play that music. (music)
Okay, I know you're not done, and I didn't expect you to be, but let's at least, before
we close shop today, at least go through and show the answers to, you know, 11 through
13 to see if you have any questions.
Did I give you any long-term assets or long-term
liabilities to try to fool you? I'll do that eventually. Remember, we don't analyze those changes in
the operating section. But there's the answers to 11, 12, and 13,
okay? All right, any questions on that, folks? Okay, let me talk about what I want you to
do for next time, okay? Well, I want you to finish the handout, okay? I want you to do all 20 of these, okay? And, you know, number 20 looks a little different,
but I still want you to do it. It's the same methodology, but it looks a
little different. So do number 20, okay? Do the whole handout. Make sure all 20 of these are done for next
time.
Remember that you have, you know, you have
the check figures for what they should be, what the answers should be arrived at. Go ahead and show the detail. And then, besides finishing up that handout,
I want you to do this handout right here that everybody should have. You all have this? This is time value of money. Remember time value of money? This is Time Value of Money, Handout #3. All this is is we're just reviewing time value
of money to get it back up to the top of your brain again as we approach the test. Now this was Lecture 217. Our test is after session 219, okay? So as soon as the cameras stop rolling I'll
tell you what day that is, but I don't want to say it on camera, it'll foul everybody
up at home. So I want you to finish the handout, and I
want you to do Time Value of Money, Handout #3 for next time. We only have two more lectures, and then the
test, okay? Bye-bye.