This presentation we will take a look at the tools needed in order to complete a statement of cash flows. to complete a statement of cash flows, we are typically going to need a comparative balance sheet that’s going to include a balance sheet from the prior period, whether that be the prior month or the prior year and a balance sheet from the current period, then we’re going to have to have an income statement. And then we’ll need some additional information in a book problem, it’ll typically give us some additional additional information often having to do with things like worth an equipment purchases, whether equipment purchases or equipment sales, were their investments in the company where their sales of stocks, what were the dividends within the company. In practice, of course, we would have to just know and recognize those types of areas where we might need more detail. And we would get that additional information with General Ledger we’d go into the general ledger, look at that added information. Now once we have this information, our major component we’re going to use is going to be the comparative balance sheet. That’s where we will start. So that comparative balance sheet is going to be used to make a worksheet such as this.
This may seem unusual considering we’re talking about a cash flow statement, we’re talking about activity, we’re talking about things that are happening over time. And that usually you would think correlate to the income statement, because that’s also something that would be happening over time. But what we’re going to do is kind of back into the activity that’s happening over time by looking at the change by looking at the difference between two points in time. So what we will typically do is take our balance sheet and put it into just a worksheet. This worksheet is more of a trial balance type, it looks like a post closing trial balance for two years. In this case, two periods, we can see that the debits are positive, the credits are negative for this worksheet, debits minus credits equals zero. So that means that the debits equal the credits for this year, the debits equal the credits for the second year, and if we take the difference between the two then The change will have a change that will be equal to zero. So this is going to be the type of worksheet we’ll put together from the balance sheet in order to then move forward. Now, of course, this will give us a lot of the information we’re going to use.
This is the primary worksheet, these differences don’t represent balance sheet accounts as of a point in time, what they really represent is the change what happened, what’s going on over time. And therefore these differences really result in income statement type of activity, the income statement reporting, the change, oftentimes with many of these accounts. So this is going to be the primary thing that we will look at. Now when we go to some of these items. However, we’re going to say, Hmm, maybe we don’t have enough detail. For example, if we look at the change in retained earnings, most of that’s going to be net income, it’s going to be the change in retained earnings. But we could have also had some other things happen. We could have had, for example, dividends that were paid or something like that. So some of these type of accounts. The same is going to be with equipment. So We see a change in equipment. Well, that could have been a purchase, but there might have been a loan that was on the equipment or some other things as well. So the change in accumulated depreciation is typically going to be depreciation expense. But there might be some other things like a sale of equipment or purchase, they can throw that off as well.
So we’re just going to note those things. And we’re going to look at the income statement to verify some of them. For example, the change in retained earnings should equal if it’s net income, that’s on the income statement, and we can determine that and if it’s not net income, then we can look at retained earnings and see what else is included in the GL other than retained earnings to make up this change. If the change in equipment is not just a cash purchase of equipment, something else happen if there was multiple purchases of theirs alone. We can go to the geo and look at that activity and then pull out the loan documents because not too much activity should be in the equipment account. We should only purchase a few things we you know we didn’t purchase things every day. The equipment account. And the same for accumulated depreciation if the change happens to not be what is on the income statement for depreciation expense as you would think the change for accumulated depreciation would be, we can then go to the income statement saying is it is that what depreciation expense is? Is it equal to this change in accumulated depreciation? If it is fine, and we’ll use that number. If it’s not, then we got to go into the GL and say, okay, was there a sale of equipment or something else that would happen, that’s going to throw off or make us do something different. So that’s going to get into the alternative information that we’re going to be needing.
So tools will need balance sheet for two time periods, the prior period and the current period, which we can use to create a worksheet such as this income statement and give us some more detail about some of these changes in the numbers more of the story, and then additional information in a book problem. They’ll just give us additional information in real life. We would go through some of these changes and say is this you know, can I Check this out by looking at the geo. Looking at some additional information that may be needed to verify a couple numbers that we pretty much get used to verifying as we do a figure these cash flow statements.