Let's apply what we've learned to the Garden Spot case. Now, remember, in the first year, Mary Jo had started the Garden Spot, she started it on January 1st, several things happened during the first year and we, in our prior work, have done several things. We've recorded transactions, we prepared an income statement for the first year of operations, and we prepared a balance sheet as of the end of the first year. Now we need to prepare a statement of cash flows for the first year of operations. Remember that we can explain the change in cash by looking at the change in all the other accounts on the balance sheet. So I'm going to suggest that if we have a comparative balance sheet, a beginning balance sheet, and an ending balance sheet. A little bit more information, then we should be able to prepare a statement of cash flow. Let me illustrate. We're going to start with the operating activity section of the statement of cash flow. And we'll make some adjustments to net income. And then we'll continue with the investing activity section and then the financing activity section. But each time that I've put something on the statement of cash flow, I'm going to suggest that you go to the balance sheet. And look to see if I've included the change in any balance sheet account on that statement of cash flow. And if I have, we'll check it off. So let's get started. Okay, let's start again with the operating activities section of the statement of cash flow. Recall that our net income for the year was $5,610. So this statement of cash flow starts with net income. I'm going to move over to the balance sheet and let's look at this retained earnings account. Remember, retained earnings is affected by two things. It's affected by net income which causes retained earnings to increase and it's affected by dividends which causes retained earnings to decrease. Net income in the period was $5,610 and we had no dividends, so the entire change in the retained earnings balance has been captured on the statement of cash flow. By putting the net income number of 5,610 at the top of the statement of cash flow. So I'm going to check that balance sheet account off. Okay, remember in the operating activity section under the indirect method, we're starting with net income, and then we're going to make some adjustments to net income. That account for the difference in the timing of accrual accounting based entries and actual cash receipts and outlays for each line item on the income statement. So we can envision an income statement that sits up at the top of the statement of cash flow, and it ends in net income, which is exactly where the statement of cash flow begins. So that income statement has revenues and then it has some expenses and net income. So let's think about the adjustments we need to make to net income because we've used accrual accounting to come up with the entries that lead us to prepare the income statement. Well there's several accounts, they're typically current asset and current liabilities accounts, that hold that non-cash piece of each income statement, line item. Accounts receivable is one. If we have revenues that are not all cash, they're sitting in accounts receivable. Inventory is another one. If we don't sell all our inventory so it's not all showing up in cost of goods sold, it's still sitting in inventory. Accounts payable is another one, if we buy inventory but we haven't yet paid for the entire amount, that's sitting in accounts payable. Wages payable is another one. If we incur wage expense but we haven't yet included the payment and the paycheck to the employees, and that would be another adjustment we need to make. So these adjustments typically involved current asset and current liability accounts that we use in day to day operations. Okay, so let's make adjustments for those. The balance in the accounts receivable account goes up by $85,000. I'm going to put that as an adjustment here in the operating activity section. I'm going to abbreviate this as accounts receivable. I'll try to make it as legible as possible because we're trying to get a lot on here. We've got an $85,000 adjustment because the revenues on our income statement were not all cash. I'm going to put this in parentheses because the increase in the accounts receivable acts like a cash outflow. If we didn't collect the revenues in cash yet and they're in accounts receivable, it means we're delayed in getting the cash. I'm going to go to the balance sheet now and check that accounts receivable account off, because I've included the entire change in that balance, on the statement of cash flow. Let's do the same thing with inventory. The inventory account is one where we need to make an adjustment. Looking at the balance sheet, that account balance goes up by $20,000. I'm going to the statement of cash flow and the operating activities section. I'm going to make an adjustment for the increase in the inventory balance. That inventory balance went up by $20,000, I'm putting that in parentheses. Because if the inventory balance went up, it's because we haven't yet sold as much as we purchased. So we paid more cash to buy the inventory than the cost of goods sold amount recorded in the income statement. Now, go to the balance sheet and check that account off because I've included the entire change in that balance sheet account on the statement of cash flow. Let's move down to the accounts payable account on the balance sheet. That's another adjustment we need to make. Its balance goes up by $25,000. So, I'm going to put that in the operating activities section. Its balance goes up by 25,000. Even though its balance goes up, I'm going to leave that as a positive number. Why would I do that? Well, if accounts payable balance goes up, it means that we have not yet paid the cash for something that we've purchased, so it acts like a cash inflow. I'll now go back to the balance sheet and check that account off because we've included its entire balance change on the statement of cash flow. And then the next one that we'll deal with here is wages payable on the balance sheet. See wages payable balance has gone up by $5,000. We need to put that on the statement of cash flow in the operating activity section. That increase by $5,000, that's a liability. We haven't yet paid that $5,000 so it's acting like a cash inflow. Our cash account is higher because the liability balance has increased. Let's go back to the balance sheet. And I'll check that balance off. Okay. So what have we just done? We have just made adjustments to net income and the operating activity section by including the changes in the current asset and current liability account balances on the balance sheet. That are used to hold the accrual portion of an entry that's associated with the income statement. So these are our day to day current asset, current liability accounts. Now there's another adjustment that we need to make in the operating activity section. Depreciation expense. I'm going to add back depreciation expense. Why would I do that? Well, let's move up a little higher to this income statement that I have sitting on top of the statement of cash flow. There was a line item on that income statement called depreciation expense and it had 4,400 on it if we were to refer back to our income statement. So, our net income of 5,610 has been reduced by this depreciation expense of 4,400. That depreciation expense recall did not involve cash. It's just an allocation of the cost of using an asset to the period in which it was used. So it's not a cash expense so we need to add that back to net income to adjust for that non-cash expense. Now if I go to the balance sheet and look for depreciation expense, I don't see it anywhere. Well, what balance sheet account does that depreciation affect? Property, plant, and equipment. Let's do a T account for property, plant, and equipment. Beginning balance of 0, ending balance of 17,600. What types of things affect property, plant, and equipment? Well one item is the depreciation expense. Okay? But that certainly doesn't account for the entire change in the balance of property, plant, and equipment of 17,600. So I haven't yet qualified myself to check off the property, plant, and equipment balance. So, I'm done with the operating activity section. If we add all of this up starting with net income and then all of these adjustments we've made to net income, We've got negative cash flow from operations, negative 64,990. So we finished the operating activity section of the statement of cash flow.