Explanation of the Topic...
Cash Flow Statement
|Part 1||Introduction to the Cash Flow Statement, What Can the Statement of Cash Flows Tell Us?|
Changes in Cash, SCF Format, 1. Operating Activities, 2. Investing Activities, 3. Financing Activities, |
4. Supplemental Info., Balance Sheet Changes, Operating Activities Adjustments
|Part 3||Story to Illustrate, January Transactions and Financial Statements, February Transactions and Financial Statements|
|Part 4||March Transactions and Financial Statements|
|Part 5||April Transactions and Financial Statements|
|Part 6||May Transactions and Financial Statements|
|Part 7||Depreciation Expense, June Transactions and Financial Statements|
|Part 8||Disposal of Assets, July Transactions and Financial Statements|
If a company disposes of (sells) a long-term asset for an amount different from its recorded amount in the company's accounting records (its book value), an adjustment must be made to net income on the cash flow statement.
For example, let's say a company sells one of its delivery trucks for $3,000. That truck is shown on the company records at its original cost of $20,000 less accumulated depreciation of $18,000. When these two amounts are combined ("netted together") the net amount is known as the book value (or the carrying value) of the asset. In the example, the book value of the truck is $2,000 ($20,000 - $18,000).
Because the proceeds from the sale of the truck are $3,000 and the book value is $2,000 the difference of $1,000 is recorded in the account Gain on Sale of Truck—an income statement account. The transaction has the effect of increasing the company's net income. If the truck had sold for $1,500 ($500 less than its $2,000 book value), the difference of $500 would be reported in the account Loss on Sale of Truck and would reduce the company's net income.
One of the rules in preparing a statement of cash flows is that the entire proceeds received from the sale of a long-term asset must be reported in the second section of the statement, the investing activities section. This presents a problem because any gain or loss on the sale of an asset is also included in the company's net income which is reported in the first section—operating activities. To avoid double counting, each gain is deducted from net income and each loss is added to net income in the operating activities section of the cash flow statement.
Let's illustrate this by returning to Good Deal Co.'s activities.
On July 1 Matt decides that his company no longer needs its office equipment. Good Deal used the equipment for one month (May 31 through June 30) and had recorded one month's depreciation of $20. This means the book value of the equipment is $1,080 (the original cost of $1,100 less the $20 of accumulated depreciation). On July 1 Good Deal sells the equipment for $900 in cash and records a loss of $180 in the account Loss on Sale of Equipment on its income statement. There were no other transactions in July.
The income statement and the statement of cash flows for the month of July illustrate how the disposal of the equipment is reported:
Let's review the cash flow statement for the month of July 2012:
The summation of the amounts on the cash flow statement is a positive cash inflow of $900. This amount agrees to our check figure—the increase in the Cash account balance from June 30 to July 31.
Let's review the cash flow statement for the seven months of January through July 2012:
The statement of cash flow's bottom line amount of $1,750 results from combining the amount totals of the previous three sections—operating, investing, and financing activities. This $1,750 agrees to the check figure—the difference in the Cash account balance from the beginning of January to July 31.
Whether you are a business person or student of business, our Master Set of 87 Business Forms will assist you in preparing financial statements, financial ratios, break-even calculations, depreciation, standard cost variances, and much, much more.
Because the material covered here is considered an introduction to this topic, many complexities have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.
Get all of our materials in PDF format when you join AccountingCoach Pro.
Where Do I Go Next?
13 videos (2 hours total) taken from our Bookkeeping Basics Seminar.
These videos are only available in our new AccountingCoach Pro members area.
300 questions with answers
This exam is only available in our new AccountingCoach Pro members area.
Join our Newsletter
Receive our free 19-page accounting cheat sheet. Plus, stay up to date with the latest questions answered.
AccountingCoach.com is designed to help people without an accounting background easily understand accounting concepts at no cost.
By investing thousands of hours, we have created clear and concise accounting information for both business people and students of all ages.
We understand how difficult accounting can be. That's why each accounting topic includes a clear explanation, reinforcing quizzes, Q&A, puzzles, dictionary of terms, etc.