Now I'd like to walk you through the information that you need, to be able to prepare the statement of cash flow using the indirect method. And I hope that I'm going to convince you that all we need to have is a beginning balance sheet and an ending balance sheet and a little bit more information and if we have, that we'll be set to prepare that statement of cash flow. So I think by now, You would agree that assets are equal to liabilities plus owner's equity. I don't need to spend much time convincing you of that at this point. I guess that you would probably also agree, that the change in assets, and I'm using this delta to represent the change, is equal to change in liabilities plus the change in owner's equity, right? Okay. And I think you would probably recall that this is our balanced sheet equations, so we starting with something that looks like a balance sheet. We know about several different types of assets, several different types of liabilities and several different owners' equity accounts. So let me add some detail to this. Let's, List down some of the assets, cash, change in cash plus the change in accounts receivable plus I think we've used inventory. Change in inventory plus the change in property plant and equipment. And I could list some more but we'll stop there, those are the ones that we've used the most. Will be equal to the change in accounts payable plus the change in wages payable plus the change in loans payable and I could add some more liability accounts. I won't do that we'll stop there. I'm running out of board space as you can see and the owner's equity account change in capital stock and change in retained earnings. So all I've done there is add some detail to what assets we might be talking about, what liabilities and what owner's equity accounts. I think I've probably got you convinced so far. Well, let's just take everything except for the change in cash and put it on other side of the equation. Nothing too sophisticated, I'm just going to move everything to the other side. Of course we know when we do that, we have to change the sign in front of those things that are moving. So minus the change in AR or accounts receivable, minus the change in inventory. Minus the change in property plant and equipment. Can you see me out there? Plus the change in accounts payable plus the change in wages payable. Now I'm just basically copying what we had here before. So the purpose there was just to move everything to the other side of this equation. Now, you'll notice here, That on this side of the equation we've got change in cash. That's what the statement of cash flow is. It's an explanation of the change in cash, so you can see at this point I can explain the change in cash using the change in all of these balance sheet accounts. Let's add a little details to some those balance sheet accounts. I'm not going to change anything on the operating type assets, account receivable and inventory. But I'm going to add a little detail to this property plant and equipment change. We know from working with the property plant and equipment account, the trunk account, the equipment account, things like that that we worked with, that balance goes up when we buy property plant and equipment. So I'm going to say purchases of PPE. We also know that the balance goes down when we sell equipment. And we also know that the balance goes down when we record depreciation. Okay, so I've added the detail to the property plan and equipment account. Let's just run with this, run this out by just pulling everything else down below, change in accounts payable, change in wages payable, change in loans payable, change in capital stock. Now we can add a little detail about the change in retained earnings as well. We know that retained earnings goes up with net income and goes down with dividends. So let's add that detail. Okay, so here again all I've done is just add some detail about the change in a couple of our balance sheet accounts. I think it might be helpful if I rearrange this a little bit. So, bear with me while I do that. I'm going to leave the change in cash there, because after all, that's exactly what we're interested in. Let's see what looks like a good thing to put it all. I think I'll start with net income, I like that. So I'll make sure it get's here at the beginning of this equation and maybe we'll move this depreciation expense more towards the beginning of this formula. So we have a negative times a negative. That's a positive, so I'm just going to say plus depreciation. Yeah, okay, what should we do next? I'm going to find these short term current asset accounts and current liability accounts that are operating in nature, those that we use for day to day operations. And I'm going to put those down here, okay? This is a minus change in accounts receivable, minus the change in inventory. Let's get these two plus the change in accounts payable, plus the change in wages payable. All right this is looking good. Okay, now all right, we probably ought to do something with this. So let's do minus the purchases of PPE. And minus times a minus is a plus. The sale of PPE. Yeah. Okay, things are looking almost complete. Let's get these other items. And change in loans payable, plus the change in capital stock, minus dividends. Okay, so I think I've brought everything down with us here, I haven't left any of these accounts out. Now does this make sense intuitively? Change in cash would get bigger if we have bigger net income. Okay, let's see, it would get smaller if we have accounts receivable go up because instead of having the cash we would have receivables, that seems to make sense. Cash goes down when we purchase PPE, that's seem to make sense. Yeah, when we sell PPE, it goes up. Okay, when we get take out loans or issue stock cash would go up and if we pay dividends it will go down. So, all the signs seem to be in the right direction. Now this is starting to look a little familiar to me and it might be to you as well. Notice, That these items are what we would call operating items or operating activities. Those are related to our normal business operations. These Are related to out our investing activities. The cash flows that are related to the purchase or sale of long lived assets or the non-operating assets. And these, Are related to the financing activities. Taking out loans, issuing stock, paying dividends. Those cash flows that result from transactions with our owners or our creditors. So by regrouping these we've been able to see a group of accounts that seem operating in nature. A group that seem investing in nature, and a group that seem financing in nature. Which is exactly what we would want to see if we're doing the statement of cash flow. An operating activities section, an investing activity section and a financing activity section. So what we've done here is we've been able to take the change in cash, right? The change in cash and explain that using the change in every other balance sheet account. And then we added a little additional information, we added some information about what causes PPE to go up and down and we added some information about what causes retained earnings to go up and down. So at this point I think what we see is we can explain the change in cash. If we have a beginning balance sheet and an ending balance sheet and just a little bit more information. Hopefully, the light bulb turned on.
