Cash Flow Statement

On March 8 Good Deal receives $800 for the calculators sold to the school on February 25. No other transactions occurred in March.

The Good Deal financial statements dated March 31 are:

Good Deal Co. Income Statement For the Month Ended March 31, 2007 Revenues $ 0 Expenses    0 Net Income $ 0

Good Deal Co. Income Statement For the Three Months Ended March 31, 2007 Revenues $800 Expenses   500 Net Income $300

Note that the year-to-date net income causes the amount in the owner's capital account (on the balance sheet) to increase from $2,000 to $2,300.

Good Deal Co. Balance Sheet March 31, 2007 Assets Liabilities & Owner's Equity Cash $2,100 Liabilities $       0 Accounts Receivable 0 Owner's Equity Inventory 200 Matt Jones, Capital (excl. net inc.) 2,000 Matt Jones, Curr Yr. Net Income      300             Total Owner's Equity   2,300 Total Assets $2,300 Total Liabilities & Owner's Equity $2,300

Good Deal Co. Statement of Cash Flows For the Three Months Ended March 31, 2007 Operating Activities Net Income $    300  Increase in Accounts Receivable 0  Increase in Inventory     (200) Cash Provided (Used) in Operating Activities 100  Investing Activities          0  Financing Activities Investment by Owner $2,000  Net Increase in Cash 2,100  Cash at the beginning of year         0  Cash at March 31, 2007 $2,100

The income statement for the first three months of the business shows a net income of $300. The operating activities section of the statement of cash flows begins with the $300 in net income, but then shows that $200 of cash was used to increase inventory. As a result, only $100 of cash was provided from operating activities.

The statement of cash flows also shows that $2,000 was received from the owner's investment in the company. The net cash inflow from the company's operating, investing, and financing activities for the three months ended March 31, 2007 was $2,100.

The figure of $2,100 represents the change in cash from the beginning of the accounting year through March 31. If you look at the March 31 balance sheet, you will find that it confirms this--there is $2,100 in the Cash account on March 31 and there was $0 on January 1.

The statement of cash flows presented above was for the three months ended March 31, 2007. Let's look at how the statement of cash flows would be prepared for just one month--March 2007.

Since much of the information for the cash flow statement comes from changes in balance sheet accounts, we need to have the balance sheet amounts for both February 28, 2007 and March 31, 2007. The differences in these account balances from February 28 to March 31 will provide us with information we need on the activities in March.

Good Deal Co. Balance Sheets March 31 and February 28, 2007 Assets 3-31-07  2-28-07 Change  Cash $2,100  $1,300 $ 800  Accounts Receivable -0- 800 (800) Inventory      200       200      -0- Total Assets $2,300  $2,300 $   -0- Liabilities & Owner's Equity Liabilities $      -0- $     -0- $   -0- Owner's Equity Matt Jones, Capital (excl. net inc.) 2,000  2,000 -0- Matt Jones, Curr Yr. Net Income      300       300      -0- Total Owner's Equity   2,300    2,300      -0- Total Liabilities & Owner's Equity $2,300  $2,300 $   -0- (If you are wondering why March 31 is shown before February 28, it is because accountants usually place the most current amounts closest to the account names. This is a courtesy to the reader in that these are assumed to be the more important amounts and will be easier to read if placed closest to the words.)

Focus on the "Change" column above. The first amount, a positive $800 change in the Cash account, will serve as a "check figure" for the bottom line of the cash flow statement for the month of March. In other words, the cash flow statement for March must end up explaining this $800 increase in the Cash account. The other amounts in the "Change" column will be used on the statement of cash flows to identify the reasons for the $800 increase in cash.

Since there were no sales and no expenses in March, the income statement for the one month of March (see above) reported no net income. This $0 of net income is the first amount reported on the statement of cash flows. The changes in the balance sheet accounts from February 28 to March 31 provides the other information we need for the one month of March:

Good Deal Co. Statement of Cash Flows For the Month Ended March 31, 2007 Operating Activities Net Income $       0  Decrease in Accounts Receivable 800  Change in Inventory         0  Cash Provided (Used) in Operating Activities 800  Investing Activities         0  Financing Activities         0  Net Increase in Cash     800  Cash at the beginning of year   1,300  Cash at end of month $2,100

Let's review the cash flow statement for the month of March 2007:

• Net income for March is $0, since there were no revenues, gains, expenses, or losses.
• Cash increased by $800 because $800 of accounts receivable were collected during March.
• Inventory did not change, so Cash was not affected. (We could omit this line since it had no effect on cash.)
• There were no changes in long-term assets during March, so nothing is reported in the investing activities section.
• There were no changes in long-term liabilities or stockholders' equity; hence, nothing is reported in the financing activities section.
• The summation of the amounts on the statement of cash flows is a positive $800. This amount agrees to the increase in the Cash account balance from $1,300 on February 28 to $2,100 on March 31.

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