Cash Flow Statement -Direct 

Unlike the major financial statements, cash flow statement is not prepared from the adjusted trial balance. The information to prepare this statement usually comes from three sources:

1. Comparative Balance Sheet provides the basis for determining the amount of the changes in assets, liabilities, and equities from the beginning to the end of the period.
2. Current Income Statement Data help the reader determine the amount of cash provided by or used by operations during the period.
3. Selected Transaction Data provide additional detailed information needed to determine how cash was provided or used during the period.

Preparing the statement of cash flows from the data sources above involves three major steps:

Step 1. Determine the change in cash:
This procedure is straight forward because the difference between the beginning and the ending cash balance can be easily computed from an examination of the comparative balance sheet.

Step 2. Determine the net cash flow from operating activities:
It begins with all the activities reported on the Income and Expense. This procedure is more complex than the change in cash because it involves both analyzing the current year's income statement, the changes in the comparative balance sheets and selected transactions data to determine all of the changes due to operating activities..

Step 3. Determine net cash flows from financing activities:
Finance activities involve all activities that affect the debt or equity section of the balance sheet and their effects upon cash.  In essence, financing activities the funding of the company’s growth (or the reduction in the funding). 

Step4. Determine net cash flows from investing activities:
Investing activities involve all activities that affect the investment portfolio section of the balance sheet and its effect upon cash. 

ASSIGNMENT INSTRUCTIONS

Prepare a cash flow statement using EITHER the “Direct Method” of Cash Flows or the “Indirect Method” of Cash Flows.  Use the format found on the last page of this document based upon the following information and Financial Schedules.

TRANSACTION DETAIL:

• 2003 is the first year of operations for Tax Consultants Inc.
• It adopted the accrual form of accounting.
• The company issued 90,000 shares of stock at a par value of $1.00 per share for a total of $90,000 and deposited it in the company’s checking account.
• Since the company did not need all $90,000 for operations, it invested $30,000 in interest bearing investments at 10%. 
• On December 15, 2003 the company received $3,000 in interest income for the investments and deposited into its checking account.
• It performed tax consulting services throughout the first year and billed clients every month for its personnel billed time of $125,000 spent with the client.
• The billing period was net 30 days and at the end of the year there was $36,000 still in Accounts Receivable from the billings. 
• The company paid salary and benefit expenses of $55,000.  The company paid all salary and benefit accruals for the 2003 year on December 15, 2003 leaving no payables for salary and benefits in the accounts payable account.
• Tax Consultants, Inc. signed a contract to rent its office space and furniture and equipment for $15,000 for the year.
• The office space and furniture rental agreement also specified that a $2,000 security deposit be paid upfront. On January 15, 2003, the company paid its $1,250 rent payment for January along with the security deposit for a total of $3,250.
• The company was billed on the first of the month for the remainder of the rent and furniture for each of the 11 successive months at $1,250 per month.  The company paid its last monthly rent payments for the year on December 15, 2003.
• The company had other operating expenses of $13,000.  The company was billed for expenses throughout the year and paid them within 30 days of due date.  At the end of the year, there was $5,000 in accounts payable from outstanding invoices unpaid.
• Income taxes based upon the company’s monthly accruals totaling $6,000 was paid on December 31, 2003.
• The company paid is stockholders a dividend of $14,000 on December 31, 2003 for its first year of operation.
  

Tax Consultants Inc.
Income Statement
For the year ended December 31, 2003

Revenues Billings from clients Income on investments      Total Revenues Operating Expenses Salaries and Benefits Office space and furniture rental Other operating expense      Total Expenses EBITA  (Earnings Before Interest, Taxes, accumulated Amortization) Income tax expenses Net Income Dividends paid

$125,000 $    3,000 --------- $128,000 $55,000 $15,000 $13,000 --------- $  83,000 $ 45,000 (   6,000) ---------- $ 39,000 $14,000

 

Tax Consultants Inc.
Comparative Balance Sheet-
For the years ending December 31

Assets				Liabilities and Stockholder's Equity
Current Assets Cash (checking account) Investments Accounts receivable        Total current assets Long Term Assets Rent security deposit Total Assets	Dec. 31, 2003 $52,000 $30,000 $36,000 ----------- $118,000       $2,000 | $120,000 ======	Dec 31, 2002 $-0- $-0- $-0- --------- $0       $-0- $0 =====		Liabilities Accounts payable        Total current Liabilities Equity Common stock Total Retained earnings Total Liabilities & Capital	Dec. 31, 2003         $  5,000 --------- $   5000       $90,000 $25,000 --------- $120,000 =======	Dec 31, 2002     $-0- --------- $0       $-0- $-0- ------- $-0- =====

 

 

Tax Consultants Inc.
Cash flow Statement-
For the year ended December 31, 2003

Cash, January 1, 2003 Cash Flows From Operating Activities: Net cash provided by operating activities Cash Flows From Financing Activities: Net cash provided by financing activities Cash Flows From Investing Activities: Net cash provided by investing activities Total Net Cash Flow Cash, December 31, 2003