Review from Class The Statement of Cash Flows break cash transactions into three categories Operating related to revenue and expenses reported on the income statement Investing related to purchase and sale of long term assets and investment securities Financing related to debt and equity transactions First measure the change in each balance sheet account The change in balance sheet accounts will help reconcile the income statement amounts which are accrual basis Second classify each balance sheet account as operating investing or financial Third use the income statement as supplemental information Indirect Method for Operating 1 Start with Net Income 2 Adjust for non cash revenues gains and expenses losses 3 Adjust net income for changes in current assets and current liabilities 4 Sum amounts to get net cash from operating activities The income statement balance sheets and additional information for Video Phones Inc are provided Video Phones Inc Balance Sheet December 31 2012 2012 2011 Assets Current assets Cash Accounts receivable Inventory Prepaid rent 186 000 144 000 81 000 60 000 105 000 135 000 12 000 6 000 Long term assets Investment in bonds 105 000 0 Land 210 000 240 000 Equipment 270 000 210 000 Accumulated depreciation 69 000 42 000 900 000 753 000 Accounts payable 66 000 81 000 Interest payable 6 000 10 000 15 000 14 000 285 000 225 000 Common stock 300 000 300 000 Retained earnings 228 000 123 000 Total liabilities and equity 900 000 753 000 Total assets Liabilities and Stockholders Equity Current liabilities Income tax payable Long term liabilities Notes payable Stockholders equity Video Phones Inc Income Statement For the Year Ended Dec 31 2012 Revenues 3 036 000 Expenses Cost of goods sold Operating expenses Depreciation expenses Loss on sale of land Interest expense Income tax expense Total expenses Net income 1 950 000 858 000 27 000 8 000 15 000 48 000 2 906 000 130 000 Additional information for 2012 a Purchase investment in bonds for 105 000 b Sell land costing 30 000 for only 22 000 resulting in an 8 000 loss on sale of land c Purchase 60 000 in equipment by borrowing 60 000 with a note payable due in three years No cash is exchanged in the transaction d Declare and pay a cash dividend of 25 000 Requirement 1 Prepare the cash flow statement using the indirect method Indirect Method Video Phones Inc Statement of Cash Flows Indirect Method For the Year Ended December 31 2010 Cash Flows from Operating Activities Net income 130 000 Adjustments for noncash effects Depreciation expense Loss on sale of land Increase in accounts receivable 27 000 8 000 21 000 Decrease in inventory 30 000 Increase in prepaid rent 6 000 Decrease in accounts payable 15 000 Decrease in interest payable 4 000 Increase in income tax payable 1 000 Net cash flows from operating activities 150 000 Cash Flows from Investing Activities Purchase investment in bonds Sale of land 105 000 22 000 Net cash flows from investing activities 83 000 Cash Flows from Financing Activities Payment of cash dividends Net cash flows from financing activities Net increase decrease in cash Cash at the beginning of the period Cash at the end of the period 25 000 25 000 42 000 144 000 186 000