[pia ach]

I am getting confused with what to deduct and what to add in this section…in a question from WTB to calculate interest expenses

Accrued interest payable 17,000 decrease is deducted

Prepaid interest 23,000 decrease is added .

However as per my notes from becker the decrease in prepaid expenses are deducted and decreases in accrued liabilities added.

Can someone please explain

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[UHC2005]

Are you using the direct or indirect method in this case? Here is the indirect method:

Cash Flows from Operating Activities:

Net Income

+ Non-Cash Expenses:

(Depreciation, Depletion & Amortization Expense)

+ Non-Operating Losses:

(Loss on Sale of Non-Current Assets)

− Non-Operating Gains:

(Gain on Sale of Non-Current Assets)

+ Decrease in Current Assets:

(Accounts Receivable, Prepaid Expenses, Inventory etc.)

− Increase in Current Assets

+ Increase in Current Liabilities:

(Accounts Payable, Accrued Liabilities, Income Tax Payable etc.)

− Decrease in Current Liabilities

= Net Cash Flow from Operating Activities

Using Ninja MCQ, NINJA Notes, Audio, Flashcards and BLITZ, and 2014 Wiley Text

FAR - (61,63)
AUD - (68)

Keep Calm and RTMFQ

Accountant, what is best in life? To crush your MCQs, see them driven before you, and hear the lamentation of their SIMS!

[pia ach]

Thanks UHC2005.. the question just asks for interest expense for the year and cash paid for the interest in the year 70,000. So i think its the direct method. how does it work out under direct method?

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[M.O.D.]

To convert accrual to cash:

Interest payable is a liability so a decrease would be a debit.

Prepaid interest is an asset so a decrease would be a credit.

So the corresponding effect would be a credit to cash (or expense) thus an decrease

and a debit to cash (or expense) thus an increase.

Try to find a T-account method for cash flow statements (Spiceland Intermediate textbook is where I discovered it). It is the only way that works for me.

But if you want to convert from cash to accrual you would reverse the deductions, additions.

It is best to post the entire question, because calculating interest expense is not part of the statement of cash flows.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Mr. Dim]

FAR - 95
AUD - 98
REG - 92
BEC - 10/4/14

[stoleway]

Think about it this way, both the direct and indirect method considers short-term assets and liabilities in cash flow analysis.

Cashflow is based on cash basis, so everything that sounds positive (added) will be negative (subtracted) for cash basis.

You need to be able to determine what assets and liabilities are in order to follow this trick I'm using.

ACCRUAL……………………………………………..CASH BASIS/ CASHFLOW

Asset increases- Add (positive)…………………………………………….. subtract (negative)

Asset Decreases subtract(positive)…………………………………………….add (negative)

Liability increases subtract ((negative)…………………………………………add (positive)

Liability decreases add (positive)………………………………………………… subtract(negative)

If you know this trick, you can easily make it through cash-flows as well as accrual and cash conversions

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Mjganier]

Cash flow statement

There is a really great and easy explanation by jenuno01 almost halfway down the page. I was absolutely terrible at cash flows and this really simple and easy correlation has made all the difference for me!

FAR 8/18/2014--87
AUD 10/18/2014--78
REG 11/24/2014--76
BEC 2/28/2015--76

"If you can't explain it simply, you don't understand it well enough"-Albert Einstein

Study Mats: Cpaexcel study text and EQ, Ninja MCQ, Ninja notes

[stoleway]

@pia ach

Post the question, there is a simple formula you can use to find interest expense or cash paid for interest.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[pia ach]

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:

Accrued interest payable 17,000 decrease

Prepaid interest 23,000 decrease

In its income statement for the current year, what amount should Ness report as interest expense?

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[stoleway]

@pia…I've forgotten most of the FAR concepts, let me know if the answer is 76000 and I will do my best to explain

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[M.O.D.]

Yes, answer is 76.

First, this is a direct cash flow statement, if it tells you how much cash was paid for each line item.

Second make some T accounts

Int exp 70

… cash 70

Int exp 23

… ppd interest 23

Int payable 17

…. int exp 17

total int exp: 76

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[pia ach]

you are right it is 76000.

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[stoleway]

Ok, so the simple formular to do this is to have the accrual assumption, this only applies to the direct method. It will also help you to find other elements like CASH DISBURSED OR EXPENSES

17,000 decrease in Liability (add)

23,000 decrease in Asset (subtract)

X- this is the expenses

= 70,000(cash disbursed)

therefore

17,000 + Expenses – 23,000 = 70,000

Expenses= 76,000

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[pia ach]

Thanks for explaining everybody, but somehow i just wasted the whole day trying to understand this..and it just does not seem to stick .. i think i know the concepts but when i try to do the mcq's i am so lost..scheduled my test on aug 30…if i dont clear i lose my reg..am feeling so lost now…will move to another topic now, and come back to it with a fresher mind later in the week..

Finally done!!! Experience-pending. Ethics- Pending.
Reg 78 / 73/82.
Aud 74/89.
BEC 72 /78.
FAR 74/ 73/ 82.

[shong22]

assume accrual basis method of expenses=X X-$23,000+$17,000=$70,000 use direct method see F7-35

X=$70,000+$23,000-$17,000=$76,000

Answer:$76,000

[YokuZure]

This formulas only work for Income calculation.

For Expenses, the logic is reversed.

[Author]

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