Statement of Cash Flows: Direct Method - Lesson 2 - YouTube

Now, it mentions here selected balance sheet account changes.

And you'll see here, for example, accounts receivable.

Now, it's important to know, it says increase or decrease.

If it's an asset, it goes up, then that would be a debit.

So, what this means is during the year, this account changed by $80.

Now, I'm gonna put it here as a debit to 80 cause, that's an increase.

We're gonna have to figure out what goes here to cause the change.

Now receivables would go up because you had sales that weren't collected in cash.

Hmm, so that would mean some of the sales may not have been cash.

They may have been an IOU called a receivable.

We have increase in investment under equity method.

So that would be your investment under the equity method.

So that would go up by 10, that went up by 10.

We've got an increase in inventory of 30.

So, we have inventory, 30.

And again, this isn't the balance it's the change.

We have accounts payable, which went up by 20.

Now remember, if a liability goes up that's a credit.

Increase in allowance for uncollectable.

So the allowance went up, that's also a credit of 20.

Accumulated depreciation went up by 50.

We've got bond discount that went down which is normally a debit, so that would be a credit

to decrease it.

We have deferred tax liability and that went down by 10.

We have our tax payable, 40, went up.

That's just kinda showing just you some of the changes that they gave us.

And they said these are some of the changes, it says selected balance sheet account changes

for the year.

Some went up, some went down, and so on.

In the problem, they'll usually just give you a whole statement with all the balances

on there.

So these are just some of the things that happened during the year.

Now, what we need to do, and you'll see here we kinda set up a T account for every balance

sheet account.

So receivables, investment, inventory, accounts payable, allowance, accumulative depreciation,

bond discount, deferred taxes, and taxes payable.

Now, what we want to do is take every item, convert from accrual to cash.

So the first item on my income statement is sales.

Now, what journal entry would have happened here?

We would credit sales of 600, sales are adjusted for changes in accounts receivable.

So accounts receivable went up by 80.

That's a debit.

The difference must be cash collected, which would be 520.

So notice I'm going from accrual back to cash.

So, of the sales of $600, I really only collected what, 520.

So on my statement of cash flows, on your operating- remember, this is just the operating

activity section.

Operating activity.

Operating activity had what?

Has the account, has a debit, has a credit, has a change.

So what this means is, right now, I would say collections from customers, and that has

how much, 520.

So collections from customers, and that's a debit, 520.

So I know that 520 of whatever this amount is, came in from this activity.

So, I have an increase of 520 from that activity.

That's how much cash directly came in.

Now realize, that regardless of whether you use direct or indirect, investing are the

same, financing are the same, all the numbers are still the same.

It's just, there's two different ways to get here.

You can go this way, whoop, or this way, whoop!

Where do you meet?

Same number, OK, at that 135.

So that's the first item.

Second item is what?

We're gonna take cost of goods sold.

So cost of goods sold is an expense, that's a debit.

Now what would affect cost of goods sold?

There's two things that affect cost of goods sold, inventory and accounts payable.

Now, let me go back to this first entry.

I'm lookin' for a debit of 80.

I just made up, or found my debit of 80.

I'm done with that T-account.

So, do you see how I'm accounting for the change?

It's not the balance, it's the changes.

So, what happened?

Inventory went up by 30, that's a debit here.

Accounts payable went up by 20, so I'll put a credit here, boom.

I have a debit here, boom.

Both of those are accounted for.

So, I come over here, payables 20.

The difference must be cash, let's think about it.

I sold 200, inventory went up by 30, so I must have spent 230.

But, for the stuff I bought of 230, I didn't pay for 20 of it, cause liabilities went up

by 20.

Therefore, I must of only paid, how much?

230 min-, how about 210.

So, I'll call that payments for purchases.

Payments for purchases, credit outflow 210.

Does everybody see that?

So, again I'm just trying to convert, this is accrual back to cash.

Just converting accrual back to cash.

And that's what you're gonna do throughout the income statement.