hi all, been reading comments and many seem confused about where the numbers for direct come from, the conversion are a combination of IS and BS information. the sales 300k --> 440k is simply taking the 300k + 30k from decrease in AR (decrease in AR means we collected cash) + 110k increase in unearned revenue (means we got paid for work ahead of time without doing the work) the COGS 50k --> 70k is taking the 50k of COGS + 40k increase in inventory (purchases made but not yet sold) - 20k increase in AP (purchases we have yet to pay for) the interest of 10k --> take the 10k and add the 2k decrease in interest payable (payable decreasing means we made payments) finally, the income tax of 8k --> take the 8k and add the 1k decrease in income tax payable (same reasoning as interest payable)
Thank you, I don't know why Prof, Edspira didn't respond to many people confused about the $440,000 Cash, including me. Thank you for making it clear. I was searching for next, upcoming video, ( He kept Saying, over and over ) but could not find it. I thought I was good at Operating activities Cash flow. I never thought of unearned revenue to add to sales, as cash flow.. Anyway, I like Prof, Edspira's clean and clear video-look. I though it was the same like TONY BELL's Video. I was going back and forth with their videos, thinking it was one Professor. thank you.
Hi I love your vids your basically been my number one professor in my education. But can you explain the numbers on the direct method please? I don't understand where you got the changing numbers from
Hi! Arya roohi, that's the solution of ur question! Sales revenue 300k +decrease in account receivables 30k + unearned revenue 110k=440k cash received from customer
Just in case anyone is confused, Depreciation expense under INDIRECT METHOD is added back to operating section as it is an non-cash item. Meanwhile, Depreciation expense under DIRECT METHOD has NO ADJUSTMENT (IGNORED.
Thanks for the video, Michael! I tried to do the indirect method on an actual financial statement, but the AR and Inventory delta (example: AR 2022 - AR 2021) do not match with the amount listed in the CFO for changes in AR and Inventory. Any idea why?
This is quite common and it is frustrating. Here are several possible reasons: (1) the company engaged in noncash transactions, such as acquiring an investment in another company by issuing stock, (2) in the process of consolidating foreign subsidiaries the parent company translated assets and liabilities of the subsidiaries to the currency of the parent, (3) the company acquired (or divested) a company during the year, in which case the cash outflow (or inflow, in the case of a divestiture) would appear in the investing section of the statement of cash flows but the assets and liabilities of the company acquired (or divested) wouldn't be included when calculating the changes in assets and liabilities for the statement of cash flow.
its been two or three videos you keep saying you'll get into how to go from 300k in revenue to 440k in cash from customers but we have yet to get into it. and by the next video we're on a different topic and never revisit this. could you please explain how/what we converted to go from revenue to cash received from customers please?
Hello! There is a T chart for Accounts Receivables that I believe is helpful to visualize, but essentially in order to find Cash from Customers under the Direct method you need to: 1. Start with Beginning Accounts Receivable -> 50,000 2. Add Credit Sales (Or Sales Revenue) -> + 300,000 3. Add the Unearned Revenue -> + 110,000 4. Take the Total (460,000) and subtract the Ending Accounts Receivable (20,000) 1. 460,000 - 20,000 = 440,000 440,000 is the Cash Collected in Accounts receivable OR Cash from Customers. Hope this helps! :)
The change in accounts receivable gives us 30,000. Since revenue is recorded when earned this would of all been recognised in the prior years income statement(accrual basis of accounting). Since he is converting to cash accounting, the 30,000 change in AR has been received in the 2022 FY as cash which is added to 300,000 making 330,000. The remaining comes from unearned revenue which is goods or services paid for that haven’t been delivered or earnt, which obviously isn’t included in this years accrual income statement as revenue hasn’t been earnt. So adding that to 330,000 we get 440,000 in total cash received.
The indirect method makes a lot of sense, but the direct method looks like the numbers just got made up for the sake of getting to the same answer. How is income tax expense going to be 8k then mysteriously become 9k for the sake of using the direct method? I must be missing something.
@@gertj363 I thought that too but then when you add them up they equal 229,000 which would mean his whole analysis is wrong. Really seems like he just brute forced the numbers which he didn't catch which is why he didn't make another video.
We start with the expense (8,000), but then we have to check the changes in our “income tax payable” account. You’ll see that it goes down by 1,000, meaning that, in addition to the 8,000 we payed this year, we also payed 1,000 to cover some of the deferred taxes from last year (hence the payable going down). In the indirect method the income tax expense would be taken off net income (which is the first line of the indirect SCF) however the remaining 1000 in the payable account would be dealt with later when we accounted for changes in working capital. It’s not that he fudged the numbers, it’s that the two statements behave differently.
This would be a great video if you would do a better job explaining the direct method. As far as we (the one's trying to learn) can tell, you are just pulling numbers out of thin air. It is more confusing than helpful.
hi all, been reading comments and many seem confused about where the numbers for direct come from, the conversion are a combination of IS and BS information. the sales 300k --> 440k is simply taking the 300k + 30k from decrease in AR (decrease in AR means we collected cash) + 110k increase in unearned revenue (means we got paid for work ahead of time without doing the work) the COGS 50k --> 70k is taking the 50k of COGS + 40k increase in inventory (purchases made but not yet sold) - 20k increase in AP (purchases we have yet to pay for) the interest of 10k --> take the 10k and add the 2k decrease in interest payable (payable decreasing means we made payments) finally, the income tax of 8k --> take the 8k and add the 1k decrease in income tax payable (same reasoning as interest payable)
hi all, been reading comments and many seem confused about where the numbers for direct come from, the conversion are a combination of IS and BS information.
the sales 300k --> 440k is simply taking the 300k + 30k from decrease in AR (decrease in AR means we collected cash) + 110k increase in unearned revenue (means we got paid for work ahead of time without doing the work)
the COGS 50k --> 70k is taking the 50k of COGS + 40k increase in inventory (purchases made but not yet sold) - 20k increase in AP (purchases we have yet to pay for)
the interest of 10k --> take the 10k and add the 2k decrease in interest payable (payable decreasing means we made payments)
finally,
the income tax of 8k --> take the 8k and add the 1k decrease in income tax payable (same reasoning as interest payable)
🥰
Exactly student needed to see it 😮
thanks for this comment, super helpful!
Thank you, I don't know why Prof, Edspira didn't respond to many people confused about the $440,000 Cash, including me. Thank you for making it clear. I was searching for next, upcoming video, ( He kept Saying, over and over ) but could not find it. I thought I was good at Operating activities Cash flow. I never thought of unearned revenue to add to sales, as cash flow.. Anyway, I like Prof, Edspira's clean and clear video-look. I though it was the same like TONY BELL's Video. I was going back and forth with their videos, thinking it was one Professor. thank you.
finally someone who can explain accounting clearly Thanks!
You explained this clearer in 6 minutes than my professor did in 1 hour and 15 minutes.
I have my exam in few hours and the video is a great help. Thanks!
Thank you Michael. This is really helpful. I'm not sure how to show my gratitude to you, you made all my accounting courses easier!
This has to be sarcasm
Hi I love your vids your basically been my number one professor in my education. But can you explain the numbers on the direct method please? I don't understand where you got the changing numbers from
Hi! Arya roohi, that's the solution of ur question! Sales revenue 300k +decrease in account receivables 30k + unearned revenue 110k=440k cash received from customer
Thanks For explaining thsi concept in a detail way and that too in a shot time
I definitely prefer the indirect method. I like seeing the noncash line items get adjusted on the cash flow statement.
You saved me! thank you! my exams are just 21 hours away
Thank you. You are a life saver.
Just in case anyone is confused, Depreciation expense under INDIRECT METHOD is added back to operating section as it is an non-cash item. Meanwhile, Depreciation expense under DIRECT METHOD has NO ADJUSTMENT (IGNORED.
Thank you for your video! It helps me to identify those accounts from SFP for Indirect Method in CFS.
Thanks for the help! Very good explanantion.
Good explanation, thank you!
Glad you enjoyed it!
why sales revenue become 440k in cash flow? when it is only 300k only in income statement?
Can u please explain more the direct model
Thanks for the video, Michael!
I tried to do the indirect method on an actual financial statement, but the AR and Inventory delta (example: AR 2022 - AR 2021) do not match with the amount listed in the CFO for changes in AR and Inventory. Any idea why?
This is quite common and it is frustrating. Here are several possible reasons: (1) the company engaged in noncash transactions, such as acquiring an investment in another company by issuing stock, (2) in the process of consolidating foreign subsidiaries the parent company translated assets and liabilities of the subsidiaries to the currency of the parent, (3) the company acquired (or divested) a company during the year, in which case the cash outflow (or inflow, in the case of a divestiture) would appear in the investing section of the statement of cash flows but the assets and liabilities of the company acquired (or divested) wouldn't be included when calculating the changes in assets and liabilities for the statement of cash flow.
@@Edspira Thanks for getting back to me. I appreciate you!
No problem!
Nice Explanation
For indirect CF statement, why is Wages Payable not showing as ($20,000)?
its been two or three videos you keep saying you'll get into how to go from 300k in revenue to 440k in cash from customers but we have yet to get into it. and by the next video we're on a different topic and never revisit this. could you please explain how/what we converted to go from revenue to cash received from customers please?
Hello! There is a T chart for Accounts Receivables that I believe is helpful to visualize, but essentially in order to find Cash from Customers under the Direct method you need to:
1. Start with Beginning Accounts Receivable -> 50,000
2. Add Credit Sales (Or Sales Revenue) -> + 300,000
3. Add the Unearned Revenue -> + 110,000
4. Take the Total (460,000) and subtract the Ending Accounts Receivable (20,000)
1. 460,000 - 20,000 = 440,000
440,000 is the Cash Collected in Accounts receivable OR Cash from Customers.
Hope this helps! :)
there's another video for that: ruclips.net/video/0DoEi9y6WkI/видео.html
Begining cash + sales - Ending cash
The change in accounts receivable gives us 30,000. Since revenue is recorded when earned this would of all been recognised in the prior years income statement(accrual basis of accounting). Since he is converting to cash accounting, the 30,000 change in AR has been received in the 2022 FY as cash which is added to 300,000 making 330,000. The remaining comes from unearned revenue which is goods or services paid for that haven’t been delivered or earnt, which obviously isn’t included in this years accrual income statement as revenue hasn’t been earnt. So adding that to 330,000 we get 440,000 in total cash received.
very helpful 😘
very helpfull video
sir, I thought we use the profit before tax instead of net profit for the indirect method, is it not so?
Why is cash received from customers 440,000 when sales revenue is only 300,000? Where does the rest come from?
Accounts receivable being paid in
Depreciation expense (a non cash expense) on a cash flow statement???
how u calculate receive from customer amount 4,40,000 ?
Will an increase in accounts receivable affect operating activities?
thank you
Thanks!
The indirect method makes a lot of sense, but the direct method looks like the numbers just got made up for the sake of getting to the same answer. How is income tax expense going to be 8k then mysteriously become 9k for the sake of using the direct method? I must be missing something.
David maybe it’s a typo.
@@gertj363 I thought that too but then when you add them up they equal 229,000 which would mean his whole analysis is wrong. Really seems like he just brute forced the numbers which he didn't catch which is why he didn't make another video.
We start with the expense (8,000), but then we have to check the changes in our “income tax payable” account. You’ll see that it goes down by 1,000, meaning that, in addition to the 8,000 we payed this year, we also payed 1,000 to cover some of the deferred taxes from last year (hence the payable going down). In the indirect method the income tax expense would be taken off net income (which is the first line of the indirect SCF) however the remaining 1000 in the payable account would be dealt with later when we accounted for changes in working capital. It’s not that he fudged the numbers, it’s that the two statements behave differently.
when you lads open a textbook and figure it out amend your comments, tia
This would be a great video if you would do a better job explaining the direct method. As far as we (the one's trying to learn) can tell, you are just pulling numbers out of thin air. It is more confusing than helpful.
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❤❤.
post link when you say " I have another video, blah blah" come on man.
all crap too much
you should speak more louder
hi all, been reading comments and many seem confused about where the numbers for direct come from, the conversion are a combination of IS and BS information.
the sales 300k --> 440k is simply taking the 300k + 30k from decrease in AR (decrease in AR means we collected cash) + 110k increase in unearned revenue (means we got paid for work ahead of time without doing the work)
the COGS 50k --> 70k is taking the 50k of COGS + 40k increase in inventory (purchases made but not yet sold) - 20k increase in AP (purchases we have yet to pay for)
the interest of 10k --> take the 10k and add the 2k decrease in interest payable (payable decreasing means we made payments)
finally,
the income tax of 8k --> take the 8k and add the 1k decrease in income tax payable (same reasoning as interest payable)