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Case Study: Statement of Cash Flows

Case Study: Statement of Cash Flows

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Author: Evan McLaughlin
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In this tutorial, the student will learn about statement of cash flows in a case study.

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Tutorial

"Case Study: Statement of Cash Flows"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

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Hey, everyone, and welcome to our video, today-- "Case Study-- Statement of Cash Flows." So what's today's video about? Well, we're going to look at a subject company-- Legacy Clothing. And then we're going to look at the statement of cash flows and how our company needs it, and how our company uses it. And then we're going to finish up with a case study, where we're going to be preparing a statement of cash flows for Legacy Clothing.

Let's learn a little bit about our company-- Legacy Clothing. What type of company is it? Well, it's a sole proprietorship, so it's a type of company that is owned by a single individual and where the individual and the business are legally treated as the same. The business's purpose is that it owns and operates clothing stores. It sells men's and women's and children's clothing and other related items, so it's a merchandise store. The business is located in Washington, DC, and it has a staff of 50 people.

So now our subject company and the statement of cash flows. Does our company need a statement of cash flows? Of course, we do. Well, why do we need a statement of cash flows? Well, it helps us understand the business cash position. So how the business used cash-- our cash payments that were made-- and how the business generated cash-- so, the cash receipts of the business received.

And we can categorize that activity into three main areas, and we can really understand the cash performance, in those three areas. So we have our operating activities, which are activities found on the income statement; investing activities-- transactions involving the sale or purchase of long-term assets, loaning money, and collecting the principal amounts of monies loaned; then the last area is the financing activities-- so cash received from financing, to fund operations, as well as cash paid to owners.

OK. So now let's turn our attention to preparing a statement of cash flows for our subject company, Legacy Clothing. OK. So what we have, here, is our statement of cash flows for our subject company, Legacy Clothing. And now the starting point for our statement of cash flows is our header. So we'd have to put our company name, "Statement of Cash Flows," and, since this is a period-based or activity-based statement, we need to indicate "for the period ending"-- in this case, December 31, 2012.

Now, the first section is the cash flows from operating activities. So we start with net income, and then we make adjustments to reconcile net income to cash provided by operating activities. So let's start with putting in our net income. And then the first adjustment we make, typically, would be for depreciation expense. So depreciation is a non-cash event, and so, since that expense was recorded to determine net income, we need to add that back.

And now we have our current assets. So if there was a decrease in our accounts receivable, that means that we collected on our accounts receivable, so that needs to go up. We need to adjust that, for the cash that we received.

An increase in merchandise inventory; that means that we purchased merchandise inventory. So it was a cash event. So we need to subtract that out, and the same goes with supplies. And now, if we look at our current liabilities, and the changes in those, if there was a decrease in accounts payable, that means that we paid off our accounts payable. So it was a cash outflow. So we need to subtract that, here.

If there was an increase in sales tax payable, that means that we recorded an expense for sales tax, which is included here. But since it wasn't paid, we need to add that back. And then our decrease in unearned revenue is similar to our decrease in accounts payable, in that it was just an adjustment, when we moved unearned revenue into revenue. So we've already received the cash.

So we need to subtract out this $5,000 from our net income. And if we do that, we'll see that all these transactions for our example offset. So that means that our net cash provided by operating activities was $304,000.

Now, if we move down to our investing activities. So the only thing that Legacy Clothing did was purchase a new building. So that would be a cash outflow. So they had to spend cash on that building. In that case, we would have net cash used by investing activities, because it's a cash outflow.

The next section-- cash flows from financing activities. So, in this case, they received a loan from a major bank, in order to purchase that building. So that's a cash inflow. So they brought cash in, in order to make that purchase.

And then the owners pulled money out of the business. So that's a cash outflow. So if we total those, together, we'll see that we have net cash provided by financing activities, from the loan that we received and the owner draws that were made, to net to $250,000.

So if we total all three of those sections, together-- our net cash provided by operating activities, net cash used by investing activities, as well as net cash provided by financing activities-- that will give us a change in cash of $204,000. And then the last step, if we add our beginning cash balance, that gets us to our ending cash balance, which, in this case, is $324,000. And so that ending cash balance will tie to our cash balance, on our balance sheet.

That's the statement of cash flows for our subject company, Legacy Clothing. Great. So, now that we've seen how to prepare a statement of cash flows for our subject company, let's summarize what we talked about, today. In a nutshell, we discussed our case study company-- Legacy Clothing-- we looked at reviewing the statement of cash flows, and then we walked through an example of preparing a statement of cash flows for our subject company.

I hope everybody enjoyed this video, and I hope to see you next time.

Notes on "Case Study: Statement of Cash Flows"

Overview

(00:00-00:35) Introduction and Overview

(00:36-01:59) Case Study Company and Statement of Cash Flows

(02:00-05:45) Statement of Cash Flows Example

(05:46-06:03) Wrap-up and Conclusion