[Anonymous]

Becker Question –

Statements of Cash Flows are making my head spin!

The question asks for payments for purchases of PPE.

The answer is “H” – $50,000:

$30K – Change

$40K – Sold

---

$70 – Purchases

($20) – Exchanged for bonds

---

$50 – Cash paid

So…PPE increased by $30,000 from year 1 to year 2, and the additional information says during year 2, equipment costing $40,000 was sold for cash.

I don’t understand why the $30k is added to $40, to arrive at $70k in purchases.

If the company BOUGHT $30k worth of equipment, why is that ADDED to $40k worth of equipment that was SOLD?

Please look up question CPA-04576 for me…there is too much information for me to paste (plus I don’t think I would be allowed to)

Further reasoning..

if PPE went up $30k from year 1 > year 2, that means $30k worth of PPE were added to the books and debited. but if $40k worth of PPE were sold in year 2, that means $40k worth of equip were written off the books and credited…i don’t understand why the answer says to add $30k + $40k to arrive at $70k in purchases? they never “purchased” $70k worth of equipment, only $30k!

[Anonymous]

If you sold equipment for $40k you would credit account for $40K. But if account balance when up by $30 you must have purchased equipment for $70K.

Big Bal – 150,000

Sold – (40,000)

Add – 70,000

End Bal – 180,000

Increase of $30 K.

[See Pee A]

Basic T-account. If your NET change in PPE was +30k, and you sold (40k), then in total you purchased 70k.

70 + (40) = 30 net changed

Plug in random numbers. Let's say you started the year with PPE 100k and ended with 130k (net change 30k). You also know you sold 40k. Knowing nothing else your balance would be 100-40=60. If your net change was 30, and your ending bal was 130, then 60 –> 130… 70k in purchases.

BEC 86 (08/30/11)
FAR 84 (10/13/11)
REG 88 (11/08/11)
AUD 86 (11/29/11)

Exam prep - Becker self-study

[See Pee A]

@cannotpassagain: If you are struggling with basic T-account journal entry questions, you really want to concentrate here before you move forward. Understanding journal entries and account functions, debits and credits, is necessary for moving forward. If you move ahead and aren't ready, you'll be overwhelmed and fall behind. Be sure to really understand this stuff before moving up. Good luck!

BEC 86 (08/30/11)
FAR 84 (10/13/11)
REG 88 (11/08/11)
AUD 86 (11/29/11)

Exam prep - Becker self-study

[Anonymous]

oh man I'm so embarrassed. I don't understand why the question seemed so foreign and confusing to me. yet after your guys' explanation, it's much more clear to me now.

i think becker's answer explanation (or lack thereof) made me even more confused.

the more you know, the less you know..

[Anonymous]

CannotPassAgain

make sure you know Cash Flow Statement in and out. Most people ignore NFP cash flow. It's a mistake you should not make.

Good luck on FAR

[Anonymous]

i need to read the chapter on cash flows..i'm having trouble w/direct and indirect methods. i may need to read my friend's CFA book on this chapter.

so the idea behind direct method is that you start with sales revenue and you subtract out non-cash items? and with indirect you start with NI and subtract/add non-cash items?

the problem i'm having trouble with, when they give you a B/S and I/S along with additional info, is deciding what accounts to use when backing out either with direct or indirect methods

[MICPA87]

Indirect- Operations CF

1) Always start with NI.

2)Add back everything you would normally subtract to arrive at NI (depreciation, losses, etc… you are removing the non cash items to come up with a cash basis NI).

3)Do the opposite for items that would normally add to NI (gains come to mind).

4) Now look at your CURRENT balance sheet accounts. You only care about CURRENT for operations.

-Changes in CURRENT liabilities (income taxes payable, accounts payable… etc) accounts will be followed accordingly… meaning any increases add to your NI and any decreases subtract from your NI.

-Changes in CURRENT assets accounts (accounts receivable, inventory) will be done the opposite way… meaning any increases subtract from your NI and any decreases add to your NI.

Something further to consider… treat allowances for doubtful account as a liability for CF purposes and add increases/subtract decreases from NI. I remember a few problems for Becker where they added this and it confused me.

Direct Method – CF

The examiners will typically ask for money paid to suppliers or cash sales revenue when testing this method. Remember the following…

Accrual Sales Revenue

sub- increase in A/R

add+ decrease in A/R

= Cash Sales Revenue

Cost of Goods Sold

add+ increase in inventory

sub – decrease in inventory

add + increase in A/P

sub- decrease in A/P

=Cash paid to Suppliers

I hope this helps… let me know if you need help with the investing /financing section, but I figure those are pretty straight forward. Just remember dividends received and interest paid both go in operating.

FAR(11/14/11)- 92
AUD(01/04/12)- 91
REG(05/30/12)- 93
BEC(07/21/12)- 88

CPA - Michigan

[Anonymous]

omg thanks @MICPA. i can't believe you took the time and effort to write all that just to help me out..thanks a lot!

[Anonymous]

also, in case anyone else has a problem with statement of cash flows, my CFA friend gave me the following tip:

remember DIAL:

DA

IL

if you go across, DA (decreased assets), you add it to NI

IL (increase liabilities), + to NI

if you go criss-cross, you subtract it (decrease liabilities)

(increase assets)

[MICPA87]

@cannot… no problem. I hope it helps you master cash flows and pass FAR 🙂

FAR(11/14/11)- 92
AUD(01/04/12)- 91
REG(05/30/12)- 93
BEC(07/21/12)- 88

CPA - Michigan

[Author]

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