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Worked-example setupScope and assumptions
- Northstar Advisory is a separate fictional teaching entity applying the bounded US-GAAP classifications stated here; it is not the Beacon fact pattern used in earlier examples.
- All amounts cover the year ended December 31, use whole US dollars, share one entity scope and adjusted version, and involve unrestricted Cash rather than cash equivalents or restricted amounts.
- Customer collections and rent payments are unambiguous operating activities; the cash equipment purchase is investing; bank borrowing and the cash owner distribution are financing.
- The $3,000 equipment-for-note exchange is direct and contains no constructive cash receipt or payment.
- Net income is independently given as $8,000 from $15,000 revenue less $5,000 rent expense and $2,000 depreciation expense; Accounts Receivable increased $2,000 and no other operating reconciliation item applies.
- Period
- Year ended December 31; Cash balances at beginning and end of year
- Units
- USD
- Rounding
- Whole US dollars; no rounding required
Problem
Northstar begins with $20,000 Cash. Prepare its direct-method statement of cash flows from five cash events, reconcile the $24,000 ending balance, and handle a sixth transaction in which Northstar acquires $3,000 equipment by issuing a note directly to the seller.
Classify before summing
| Event | Cash effect | Classification | Evidence in the fact pattern |
|---|---|---|---|
| Collect from customers | $13,000 | Operating | Customer collection for operating activity |
| Pay rent | (5,000) | Operating | Operating-overhead payment |
| Buy equipment for cash | (6,000) | Investing | Cash acquisition of productive asset |
| Borrow from bank | 4,000 | Financing | Creditor supplies cash under repayment claim |
| Distribute cash to owners | (2,000) | Financing | Return to owner outside expense |
| Acquire equipment by issuing note | 0 | Noncash investing and financing | Equipment and debt arise directly; Cash is absent |
The cash direction supplies the sign. The transaction's role supplies the section. Neither step can replace the other.
Prepare the statement
| Northstar Advisory — Statement of Cash Flows | Year ended December 31, USD |
|---|---|
| Operating activities | |
| Cash collected from customers | $13,000 |
| Cash paid for rent | (5,000) |
| Net cash provided by operating activities | 8,000 |
| Investing activities | |
| Cash paid to acquire equipment | (6,000) |
| Net cash used in investing activities | (6,000) |
| Financing activities | |
| Proceeds from bank borrowing | 4,000 |
| Cash distribution to owners | (2,000) |
| Net cash provided by financing activities | 2,000 |
| Net increase in Cash | 4,000 |
| Cash at beginning of year | 20,000 |
| Cash at end of year | $24,000 |
The section sum is $8,000 − $6,000 + $2,000, or a $4,000 increase. Adding that flow to $20,000 beginning Cash reproduces the $24,000 balance-sheet amount.
Keep the noncash transaction visible but outside the sum
Northstar also acquired $3,000 equipment by issuing a $3,000 note directly to the seller. The transaction increases Equipment and Note Payable but produces no cash receipt or payment. It is therefore excluded from all three cash subtotals and identified separately as noncash investing and financing activity.
Inserting a $3,000 financing inflow and a $3,000 investing outflow would leave the $4,000 net increase unchanged. That apparent tie would describe two cash events that never occurred.
Compare net income with operating cash flow
Northstar reports $15,000 revenue, $5,000 rent expense, and $2,000 depreciation expense, producing $8,000 net income. Accounts Receivable rose $2,000 because collections were $13,000 rather than the $15,000 recognized revenue. The indirect bridge is:
$8,000 net income + $2,000 noncash depreciation
− $2,000 increase in Accounts Receivable
= $8,000 operating cash flow
Net income and operating cash flow are equal here, but for different reasons. Copying one into the other would conceal the two offsetting adjustments. When the adjustments do not offset, the figures diverge: if the receivable had increased $3,000 because collections were only $12,000, with the other facts unchanged, operating cash flow would be $7,000 rather than $8,000.
Challenge the control
Suppose the $4,000 borrowing is mislabeled operating. Operating cash flow rises to $12,000; financing cash flow falls to negative $2,000. The total remains $4,000 and ending Cash still ties. The arithmetic check catches omissions, duplicates, and signs that change the total, but transaction evidence is needed to catch a pure reclassification.
Interpretation
Northstar generated $8,000 operating cash, spent $6,000 cash on equipment, and raised a net $2,000 from financing after its distribution. It also obtained another $3,000 of equipment through new debt. A financing-dependence or capital- investment analysis that reads only the net Cash change would miss most of that structure.
Common wrong paths
- Classify by debit or credit: All receipts increase Cash, but customer collection and borrowing do not share an economic role.
- Treat equipment purchase as expense: Asset acquisition and later depreciation are separate events.
- Copy net income into operations: Equal $8,000 endpoints hide offsetting depreciation and receivable effects.
- Put the equipment-for-note exchange in both cash sections: Equal fictitious flows preserve net change but violate the cash boundary.
- Stop when ending Cash ties: Reclassification among sections is invisible to the grand total.
Verified calculation · cash flow statement
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- activity
- 4 fields
Inspect data
{
"financing": {
"bank_borrowing": 4000,
"owner_distribution": -2000
},
"investing": {
"equipment_purchase_for_cash": -6000
},
"noncash_investing_and_financing": {
"equipment_acquired_by_issuing_note": 3000
},
"operating": {
"cash_collected_from_customers": 13000,
"cash_paid_for_rent": -5000
}
}- opening cash
- 20,000
- reported ending cash
- 24,000
Recomputed result
| Measure | Value |
|---|---|
| cash reconciliation difference | 0 |
| expected ending cash | 24,000 |
| financing net cash flow | 2,000 |
| investing net cash flow | -6,000 |
| net change in cash | 4,000 |
| opening cash | 20,000 |
| operating net cash flow | 8,000 |
| reported ending cash | 24,000 |
| total noncash investing and financing | 3,000 |