Statement of cash flows Constructing the Statement Illustration Continued: Some observations 1. The $20 cash decrease is the focus of explanation for the statement of cash flows-it is explained by changes in noncash balance sheet accounts 2. The $55 decrease in accounts receivable is a positive(cash inflow)adjustment to income in arriving at cash flow from operations it implies cash collections exceed accrual sales 3. The $25 increase in inventories is a negative(cash outflow) adjustment to income because cash outlays for inventory exceed purchases in cost of sales 4. Tosummarize changes in fixed assets a T-account is used: FixedAssets Beginning Acquisitions 314 100 Disposals g Both acquisitions and disposals are part of investing activities. While each transaction is reported separately in the statement of cash flows, the balance sheet shows the net of $214($314-$100 5. Changes in accumulated depreciation are summarized in a T-account: Accumulated Depreciation Accumulated 200 Beginning depreciation on assets disposed 20 Depreciation Ending Depreciation($64)is a noncash expense-a debit to income(retained earnings) and a credit to accumulated depreciation. It is added back to income in arriving at cash from operations. The $20 in accumulated depreciation relates to the $100(original cost) of fixed assets sold at book value (S100-$20= $80). The $20 of accumulated depreciation adjusts the $100 amount included in investing activities.Illustration Continued: Some observations 1. The $20 cash decrease is the focus of explanation for the statement of cash flows—it is explained by changesin noncashbalance sheet accounts. 2. The $55 decreasein accountsreceivable is a positive (cash inflow) adjustmentto income in arrivingat cash flow from operations it implies cash collectionsexceedaccrual sales. 3. The $25 increase in inventories is a negative (cash outflow) adjustment to income because cash outlays forinventory exceedpurchases in costof sales. 4. To summarizechanges in fixed assets a T-accountis used: Fixed Assets Beginning 660 Acquisitions 314 100 Disposals Ending 874 Both acquisitions and disposals are part of investing activities. While each transaction is reported separately in the statementof cash flows, the balancesheet shows the net of $214 ($314 – $100). 5. Changes in accumulateddepreciation are summarized in a T-account: Accumulated Depreciation Accumulated 200 Beginning depreciation on assets disposed 20 64 Depreciation 244 Ending Depreciation ($64) is a noncash expense—a debit to income (retained earnings) and a credit to accumulated depreciation. It is added back to income in arriving at cash from operations. The $20 in accumulated depreciation relates to the $100 (original cost) of fixed assets sold at book value ($100 – $20 = $80). The $20 of accumulated depreciation adjusts the $100 amount included in investing activities. Statement of Cash Flows Constructing the Statement