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recorded.
    • Accounts payable. Amounts owed to creditors for purchases on credit and for expenses that had not yet been paid to vendors and suppliers at balance sheet date.
    • Accrued expenses payable. Cumulative amounts owed for certain expenses of period that had not been paid at balance sheet date.
    These are called operating assets and liabilities because they are generated in the operations of making sales and incurring expenses. Operating liabilities are non-interest-bearing, which sets them apart from the interest-bearing notes owed by the business. Notes payable arise from borrowing money, not from the revenue and expense operations of the business. The operating assets and liabilities of a business constitute a good 20

    I N T R O D U C I N G F I N A N C I A L S T A T E M E N T S
    part of its balance sheet, as illustrated in Figure 2.3. This is typical for most businesses.
    The beginning and ending balances in the balance sheet shown in Figure 2.3 are the sources of the data in Figure 2.1
    for the cash flow and accrual-basis amounts of revenue and expenses. The derivation of the amounts are summarized as follows (amounts in millions of dollars):
    $2.00 beginning balance of accounts receivable
    $1.20 ending balance of advance payments from customers $3.20 cash flow from last year’s sales or for next year’s sales $2.50 ending balance of accounts receivable
    $1.00 beginning balance of advance payments from customers $3.50 sales made during the year but cash not collected during the year $1.60 beginning balance of accounts payable
    $0.60 beginning balance of accrued expenses payable $4.70 ending balance of inventories
    $0.60 ending balance of prepaid expenses
    $7.50 cash payments during year of last year’s or for next year’s expenses $1.70 depreciation expense for year (increase in accumulated depreciation) $2.00 ending balance of accounts payable
    $0.80 ending balance of accrued expenses payable
    $3.90 beginning balance of inventories
    $0.50 beginning balance of prepaid expenses
    $8.90 Expenses recorded during year but not paid during year THE STATEMENT OF CASH FLOWS
    The third primary financial statement in the external financial reports of a business to its shareowners and lenders is the statement of cash flows. This financial statement summarizes the cash inflows and outflows of a business during the same period as the income statement. Figure 2.4 presents this financial statement for the business example. The second and third sections of the statement of cash flows are relatively straightforward. In the investing activities section, note that the business invested $3.6 million in new long-term operating assets during the year to replace old ones that reached the end of their useful lives and to expand the production and 21

    F I N A N C I A L R E P O R T I N G
    Note: Amounts are in millions of dollars.
    Cash flow from operating activities
    Cash collections from revenue
    $25.7
    Cash payments for expenses
    ($22.4)
    $3.3
    Cash flow from investing activities
    Investments in new long-term operating assets
    ($3.6)
    Cash flow from financing activities
    Increase in short-term notes payable
    $ 0.5
    Increase in long-term notes payable
    $ 0.5
    Issuance of additional capital stock shares
    $ 0.2
    Cash distributions from profit to shareowners
    ($ 0.5)
    $0.7
    Net increase of cash during year
    $0.4
    Beginning cash balance
    $1.6
    Ending cash balance
    $2.0
    Note: Cash flow from operating activities is presented according to the direct method, and cash outflows for expenses are condensed into one amount.
    FIGURE 2.4 Format of external statement of cash flows for year.
    warehouse capacity of the business. (Proceeds from disposals of long-term operating assets would have been reported as a cash inflow in this section.)
    The financing activities section in the statement of cash flows summarizes cash flows of borrowing and payments on short-term and long-term debt and investment of additional capital by shareowners during the