Chapter 12: Appendix

To prepare a statement of cash flows with a spreadsheet approach, we can employ a structured method to organize and analyze changes in balance sheet accounts along with income statement data. This approach is beneficial for reconciling cash flows across operating, investing, and financing activities, ultimately helping us draft a cash flow statement using both the indirect and direct methods. Here's a breakdown of the process using the indirect method: Step-by-Step Guide to Using a Spreadsheet for the Indirect Method 1. Set Up Columns for Balance Sheets and Changes: o Set up a spreadsheet with columns for each account on the beginning and ending balance sheets. o Add columns labeled "Analysis of Changes" to indicate adjustments and reconcile the impact on cash flows. 2. Enter Initial Balances and Identify Account Changes: o Input the beginning and ending balances for each account. o Calculate the changes in each account and label them (e.g., a, b, c) as described. 3. Identify and Apply Adjustments for Operating Activities: o Enter net income as the first entry in the operating activities section. o Adjust net income based on non-cash items (e.g., depreciation, gains or losses on asset sales) and changes in working capital accounts (accounts receivable, inventory, prepaid expenses, accounts payable, etc.). o Use a debit for changes that increase cash and a credit for changes that decrease cash. 4. Record Cash Flows for Investing Activities: o Reflect cash paid or received from buying or selling long-term assets. o For Genesis’s plant asset sale, recognize cash inflow, and adjust for gains or losses to ensure accuracy in cash flow reporting. 5. Record Cash Flows for Financing Activities: o Include cash flows from issuing or repaying debt and equity transactions. o Recognize cash outflows for dividends and stock issuances as separate line items in the financing activities section. 6. Reconcile the Spreadsheet: o Verify that all changes in the balance sheet accounts have been accounted for in the cash flow statement. o Check totals for accuracy to ensure that all cash inflows and outflows net to the change in cash balance for the period. Example Entries for Genesis’s Statement of Cash Flows: Using the changes in accounts as outlined (net income, changes in accounts receivable, inventory, etc.), we can compute each adjustment to net income under the indirect method to complete the statement of cash flows. Direct Method Preparation and Key Adjustments The direct method starts with the cash flows themselves instead of net income. Here’s a step-by-step guide to converting income statement items into cash flows: 1. Cash Received from Customers: o Calculate using sales and the change in accounts receivable. If accounts receivable increased, cash received is less than sales revenue. 2. Cash Paid for Inventory: o Adjust the cost of goods sold by changes in inventory and accounts payable to estimate actual cash paid for inventory. 3. Operating Expenses (Excluding Depreciation): o Adjust operating expenses by any changes in prepaid expenses and accrued liabilities, focusing only on cash outflows for these expenses. 4. Interest and Taxes: o Compute cash paid for interest and taxes by adjusting for changes in interest and income taxes payable. Summary of Adjustments (Direct Method): The direct method requires breaking down operating cash flows by specific receipts and payments: • • Cash inflows: Typically include cash received from customers, rent, interest, or dividends. Cash outflows: Include cash paid for inventory, operating expenses, interest, and taxes. Final Verification and Statement Completion • • Cross-check calculations and ensure that all cash inflows and outflows are captured and balance to the net cash change in cash flows. For the direct method, add a reconciliation of net income to net cash provided (or used) by operating activities as required by FASB. The spreadsheet approach allows for a structured and thorough preparation of both indirect and direct cash flow statements, enabling easy verification and ensuring alignment with both income statement and balance sheet accounts.