Now, based on all these numbers from the previous spread along episode,

we're all set to start preparing the statement of cash flows.

As always, we start with the operations part.

Now, operations.

We use the indirect method.

So we start with net income.

Well, it's $39,000.

I will use zeros here. You will see why.

And that comes from our note three.

Now, go adjustments.

And I will first study the adjustments from all these notes and

then simple adjustments that come just from the changes

on the balances and compare the balance sheets.

We'll put at the very end.

So, first of all,

this is a loss on sale of long term investments, of securities.

That was number one,

and because it's a loss, it goes here.

The next thing is a loss on sale of property, plant, and equipment.

Remember that was the one that have the cost of 58,

was depreciated 80 percent,

and then the remaining cost was 10 and we sold that at eight.

So here, the loss is 2,000.

The next thing is depreciation,

and depreciation, also from number two,

and that was 24,000,

also goes on the side.

Now, patent amortization.

This is from number six.

Again, goes here, 3,000.

Bond premium amortization. This time,

that goes to the other side,

and this is 1,500.

That's number five.

And now, we add some adjustments from the balance sheet,

so decrease in the accounts receivable,

that is seven, goes here.

Increase in inventories, 27,000, goes here.

Here, I don't put notes because these are without notes.

Then increase in accounts payable.

This is on the left side, 5,000.

And then increase in salaries payable,

this is 4,000, also on this side.

So, these are taken from the balance sheet.

And the result is that if we sum everything up,

then cash flow from operations will

be equal to $64,500.

That's the first part.

Now, let's proceed.

Now, we have to cope with cash flow from investments and cash flow raised in financing.

Again, these are shorter and easier.

So cash flow investments,

what goes in here?

First of all, this is a sale of long-term investments.

Now, this is cash and this is number one,

and this is $39,000.

Again, you don't have to mix this up.

This is not nothing. This is the sale of securities.

Remember, the cost was 48 and we sold them at 39.

Loss on that we took into account earlier and here we just put this.

Now, sale of property, plant, and equipment.

This is sale and that was number two,

and this was 8,000.

Now, purchase of land.

This goes on the other side.

This is 41,000.

That was for stock and this was number four.

Now, purchase of patent,

and that was 10,000 from number six.

And then finally, cash purchases of PPE.

That's what we did this long calculation and that was 160 and that was number seven.

And the overall now,

we have that cash flow used in

investments is equal to a big negative 164,

because this is negative part,

this is the positive part.

So far, so good.

We are short of just cash flow raised in financing. Let's do it.

It's even shorter, cash flow financing.

Here come, first of all, cash dividends.

We pay this out,

so it's 6,000, number three.

Now, stock issued, that was a stock issued to purchase land,

and this is number four and that comes here, $41,000.

So, we did not get that in cash but we purchased land for that.

But we take into account both in investments and,

here, as cash equivalent.

And then, bond issued,

and that's number five,

and that's 81,500 here, also cash.

And so overall, we can see that cash

raised in financing is positive,

and this is 116,500.

Now, we put everything together and we can say that,

"What is the net change of cash flow?

Well, we can see that cash flow from operations gives us positive 64,500.

Cash flow from investment gives us a negative 164.

And then cash flow from financing is a positive 116, 500.

And you don't have to be a whiz to realize that

the overall net change in cash flow will be exactly $17,000,

as we saw on the balance sheet.

So, that ends up our calculations.

And in what follows,

we'll discuss why we spend

so much time and we use this indirect method although this number,

we could have seen the right away on the comparative balance sheets.

That was just a special case and unfortunately,

that is not always like that.

But that was a significant use or intellectual capacity,

and you'll be able to test that on your assignments to this week.

For now, we're all set.

3.4. SCF – a more advanced Example 2 (2)

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