Lesson Objectives:- Recording investing activities on the cash flow statement
- How to record financing activities
- Finalizing the cash flow statement balances
Let's finish up the cash flow statement preparation by figuring out how to record the long term investments first and then recording the financing activities of bonds payable and common shares.
Let's start off by looking at the balance sheet for the values of equipment and land that will be carried over to the cash flow statement. From 2012 to 2013, the equipment account increased by $32,000 and the land increased by $50,000.
We would first need to add a new section on the cash flow statement for the cash from investing accounts. Next, we would list the purchase of equipment which we would abbreviate as P. Equipment. Since we are increasing the long term asset and using cash, this entry would be considered a use and the $32,000 deducted from the cash flow statement.
The second entry for investing activities would be the land which is also considered an increase in the assets and a use of cash. The $50,000 cash used to purchase the land would also be deducted from the cash flow statement.
To conclude the investing activities section of the cash flow statement, we would total up the two investing entries to give us a negative figure of $ (82,000).
Let's proceed to the final section of the cash flow statement to record the financing activities.
The two items that we will be recording in the financing activities section is the bonds payable and common shares. Let's start with the bonds payable that went up $30,000 from 2012 to 2013 on the balance sheet.
We will add a third section for cash from financing and then list the bonds payable as a source. Since the bonds payable is increasing, we would be receiving cash in return from the bond holders. The increase would then be recorded as an increase on the cash flow statement.
The next item would be the common shares which increased $100,000 according to the balance sheet. This would also be an increase in cash as a result of the common shares issued by the company, therefore we are recording a source. The $100,000 would be added on the cash flow statement.
We would total the amounts of the bonds payable and common shares issued to come up with a total amount for cash from financing of $130,000.
The final step of the cash flow statement, is to come up with the change in cash and beginning and ending cash balances. The change in cash is calculated by summing up the three sections of cash from operating, cash from investing and cash from financing. This would give us a change in cash of $258,000. The cash at the beginning was $0 and the cash at the ending cash balance would be $258,000.
This example concludes the end of the cash flow statement preparation and hopefully now you have a better understanding of how a cash flow statement is created.