Summary
Highlights
Another practice problem for Kayababa Company, focusing on similar calculations using the indirect method, is introduced. Viewers are encouraged to solve it independently before reviewing the solution. The solution detail includes the calculation of operating cash flow by adjusting net income for depreciation and various current asset and liability changes, and then combining with investing and financing activities to find the ending cash balance.
The video introduces Lesson 38 on the Statement of Cash Flows for Senior High School, specifically Accounting Part 4. The main objective is to differentiate between operating, investing, and financing activities, and to prepare the Statement of Cash Flows using both direct and indirect methods.
Operating activities are the main revenue-generating activities of an entity, related to providing goods and services. These are typically found in the income statement and the current asset and liability sections of the statement of financial position. Examples of cash inflows include cash sales and collections from credit customers, while outflows include payments to suppliers, salaries, rent, utilities, and taxes.
Investing activities relate to the sale and purchase of long-term assets and other investments. These usually appear in the non-current asset section of the balance sheet, encompassing property, plant, and equipment; investment in equity securities; and investment property. Cash inflows stem from selling these assets, while outflows result from purchasing them.
Financing activities involve the acquisition of funding for the entity, affecting non-current liabilities and equity. Cash inflows include owner investments and issuing share capital, while outflows are owner withdrawals and payment of cash dividends. Payments of the principal portion of long-term debt are also financing activities, but interest payments are considered operating.
The direct method for preparing the Statement of Cash Flows is demonstrated using a problem involving 'Madame Lalisa Manoban's' service company. This method involves categorizing each cash transaction as operating, investing, or financing. The example walks through calculating cash inflows and outflows for each activity to arrive at the net cash flow and ending cash balance.
The indirect method starts with net income and adjusts it for non-cash expenses (like depreciation) and changes in working capital (current assets and liabilities). While less user-friendly than the direct method, it's accountant-friendly. This section details how to reconcile net income to net cash from operating activities, providing rules for adding/subtracting changes in current assets and liabilities.
An extensive problem for 'Excellent Company' is used to demonstrate the indirect method. This includes analyzing changes in the balance sheet from previous and current years, adjusting net income for depreciation, and then applying rules for changes in current assets and liabilities to calculate the net cash from operating activities. It also shows how to identify investing and financing activities from changes in non-current assets, liabilities, and equity.
A practice problem for Sole Company is presented, challenging viewers to apply the indirect method to calculate net cash flows from operating, investing, and financing activities, and determine the ending cash balance for 2020. The solution is then provided, illustrating the step-by-step calculations including adjustments for net loss and working capital changes.