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 activitiesThe 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 186,000 144,000 Accounts receivable 81,000 60,000 Inventory 105,000 135,000 Prepaid rent 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) Total assets 900,000 753,000 Liabilities and Stockholders’ Equity Current liabilities Accounts payable 66,000 81,000 Interest payable 6,000 10,000 Income tax payable 15,000 14,000 Long-term liabilities Notes payable 285,000 225,000 Stockholders’ equity Common stock 300,000 300,000 Retained earnings 228,000 123,000 Total liabilities and equity 900,000 753,000Video Phones, Inc. Income Statement For the Year Ended Dec 31, 2012 Revenues 3,036,000 Expenses: Cost of goods sold 1,950,000 Operating expenses 858,000 Depreciation expenses 27,000 Loss on sale of land 8,000 Interest expense 15,000 Income tax expense __48,000_ Total expenses _ 2,906,000_ Net income ___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 27,000 Loss on sale of land 8,000 Increase in accounts receivable (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 (105,000) Sale of land 22,000_ Net cash flows from investing activities (83,000) Cash Flows from Financing Activities Payment of cash dividends (25,000)_ Net cash flows from financing activities (25,000)_ Net increase (decrease) in cash 42,000 Cash at the beginning of the period 144,000_ Cash at the end of the period