Accounting Basics Part 8 - The Cash Flow Statement and Accounting for Petty Cash Okay, today in this unit we’ve really been studying about cash and internal control over cash and I thought I would take this opportunity to talk about the cash flow statement. You should have again downloaded your handouts before you started the video, and I have a statement of cash flows. This is the fourth financial statement. Way back in the beginning we looked at the income statement, the balance sheet and the statement of retained earnings, and I did not go over the cash flow statement. The cash flow statement is one we are going to be referring to in here, and I want to teach you a little bit about it, but we will not be preparing one from start to finish. But I wanted you to know, to talk about the purpose of the cash flow statement. The cash flow statement shows us what all happened with our cash during the period. Did you ever wonder that with your own money? What happened to it? Where did it go? Where did it come from? Because so much in the business that we do is on credit, and this, on the cash flow statement, all we’re going to have are just what cash came in for and what it went out for, grouped by categories. There’s three main categories on the statement of cash flow. The first category is operating activities. You’ll see here it talks about cash flow from operating activities. These are just the regular day-to-day activities taking place in the business. You’ll see here they have, again this is Family Health Care we’ve been following. We have cash receipts from customers, again that’s coming in, and we’re deducting cash payments for expenses, so we actually have a positive cash flow of $2,600 and this is a very simple statement. Once you learn the concepts it’s easier to look at something that will be a little more. It is a required statement, financial statement, for companies that are publicly held. It’s information for the stockholders. The next section is the group’s investing activities. Think about those types of things you’d be investing in; things that are long-term, like those fixed assets, investing in fixed assets for your business. This is going to be a little bit different than just the regular operating activities, because you probably plan and budget for it in the future, just like you would for your own personal finances. You plan to buy a car or a home or something that you’re going to keep for a while that would be a little more costly. So again, you’re looking at any cash that came in if you sold a fixed asset, or any cash that went out if you bought one. In this case they have acquired land for $12,000 and so that was cash going out. The third category we have down here is financing activities, and by the name itself, you can probably figure out what that is, because what do we do in our own personal life when we want to finance something? We’re talking about borrowing money usually, right? How are we going to finance it? Where’s the money going to come from? And so, because this is the corporation, another financing activity is selling capital stock, bringing on more stockholders. So any cash that we would receive from selling stock or from taking on a note would be in the add section. We’re adding these in, and then anything that we’ve paid out to pay loans back or if we paid dividends to our shareholders, that would be in the deduct section. So, basically we take the adds, here we have $6000 plus $10,000 which gave us $16,000, were taking out the cash dividends, which brings us down to, when you subtract those, you have a net cash flow from financing activities of $14,500; again this is positive. This was negative up here, our investing, because we spent money in that area and didn’t bring any money in, and here’s our operating activities. So when you take these three and combine them, I say combine because you’re going to have to subtract the negative number, if they were all negative numbers then you know we would

be combining the negative numbers. Okay, this gives us $5,100. This was a new business. If you remember, we started it back in an earlier unit, so there wasn’t any cash at the beginning of the period, and that’s what cash we have at the end. This is what’s going to appear on our balance sheet. The cash that we’ll have on our balance sheet is right here. It’s the cash on the last day of the period, but this gives us a lot more information. Now we can see where we really didn’t make that much money but we did spend a bit, didn’t we? In the investing area, and we did bring in some money from our financing activities. Now I want to take a moment to talk about petty cash. What is petty cash? It would be a box something like this the business would have which would have real cash in it for those, you know, expenses that they just are not going to use electronic payment or a check or credit. It could be as simple as paying extra postage when the postman comes or taking the company van to the car wash. Every business needs, usually needs, a little bit of money around for small purchases, but what comes into play is how are we going to account for that. When we have money sitting around, I mean we need to have an internal control over it, because, again in a business, this is the number one thing that’s most subject to theft. People want cash, even if all you have sitting around is $50 in a box, somebody is going to try to get to it. So you want to have a locked box, a box with a lock on it that one person is in charge of, because once you have …it’s kind of like a cash register when you go to the store; everybody has their own drawer now. I hate to get to Wal-Mart when they are changing out the cash drawers, right? And you have to wait because everybody needs to be responsible for their own money. So I guess you can think of it like a cash register and there needs to be a paperwork trail when money is taken out of it. So that you can keep track of where it’s going and that the purchases are authorized. I’m going to talk a little bit about petty cash and analyze… the problem that you have this week in your handout is to analyze the effect of petty cash transactions on the account and on the financial statements. So as we look at these, we’re going to look at what accounts are involved. Did they increase or decrease? What account types are they and what financial statements do they appear on? Okay, so let’s look at the first thing. The number one thing here, it says we established a petty cash fund of $1,000. Okay, petty cash actually becomes an account on our books, so when we establish a petty cash fund for $1,000 all we’re really doing is transferring from the bank to the petty cash box and you can think about that similar to the money that you have. You probably have money in the bank and you have money in your pocket. Hopefully you have money both places. So when you take it out of the bank you’re just transferring where it is. It’s still cash and you haven’t spent it yet, it’s just sitting there in a box. So the petty cash account would increase. That was one of the questions, right? And the cash account, our bank account, cash in the bank, would decrease and these are just transferring from one asset to another; and what kind of statement would this appear on? There’s really two, the current assets on the balance sheet. Now we have a category for cash and we have a category for petty cash and it would also effect the cash flow statement that we just finished looking at. Because all inflows and outflows of cash go on the cash flow statement, and it would be an operating activity, just a regular, on-going, day-to-day activity in the business, not a financing activity or an investing activity. Okay, the second transaction. here it says the amount in the petty cash fund is $315. So, we started out with $1,000 and now we’re down to $315 and so, we’re thinking we’re needing to replenish the fund. You don’t have to wait until there’s just a penny left in the box to decide that

you need to replenish it. What should also be in this box is a record of what that petty cash was spent on. Okay, it says we spent $425 on office supplies, we spent $220 on miscellaneous selling expense, and $40 on miscellaneous administrative expense. I think that there’s probably a lot of miscellaneous expenses that come out of a petty cash box so this may be a good example. Alright, so what happens when we replenish the petty cash box? Well first of all we started out with $1,000 so we want to put the difference between $1,000 and the $315 that’s left to bring it back up to $1,000. Unless you want to start keeping more money in the box, or less, you’ll write the check for the difference and what accounts are involved when you replenish the petty cash box? Once we’ve established our petty cash fund, and this time in the beginning we established it for $1,000, it just sits out there on our books at $1,000 and nothing happens with that. When we replenish the fund we’re going back to our regular bank account and taking it out, right? So, when we take it out of our regular bank account and put it back in the box we’ll be decreasing cash for how much ever we take out, but we’ll also be incurring a number of expenses. It’s kind of a delayed reaction to recording these expenses. So we’ll record office supplies, miscellaneous selling expense, and miscellaneous administrative expense and, I don’t know if I talked about this earlier but whenever you’re paying an expense of any sort the accounts are actually increasing, and I’ve had a lot of students in the past that have struggled with that concept. I’m paying an expense and the account is increasing. That’s right because expenses aren’t a debt. They’re just a category that you’re putting that money in so when you go to do your financial statements you can see how much you’ve spent on it so just kind of recording how much you spent on that expense. So we’ll actually be again decreasing cash and increasing all of those expense accounts as well as office supplies which is an asset. We bought some office supplies. Office supplies are not an expense, until we use them up. What financial statements now, when we replenish the fund, would these things appear on? Well, we know cash appears on the balance sheet, right? We talked about that earlier, any assets. The other asset we looked at here was supplies. On the income statement these would be expenses: the miscellaneous selling expense, the miscellaneous administrative expense, and then also if it involves cash it’s going to be on the statement of cash flows and that’s all for this section.