I'm trying to prepare for an upcoming accounting test.  Below is one
of the problems I've been having difficult with:

Prepare statement of cash flows (indirect method) using balance sheet
data.  Presented below are comparative balance sheets for Millco,
Inc., at January 31 and February 28, 2004.
_______________________________________________________________________________
                                   MILLCO, INC.
                                  Balance Sheets
                            February 28 and January 31, 2004
_______________________________________________________________________________
                                                      February 28  January 31
_______________________________________________________________________________
  Assets
  Cash..............................................  $ 42,000    $ 37,000
  Accounts receivable...............................    64,000      53,000
  Merchandise inventory.............................    81,000      94,000
  
    Total current assets............................  $187,000    $184,000

  Plant and equipment:
    Production equipment............................   166,000     152,000
      Less: Accumulated depreciation................   (24,000)    (21,000)

  Total Assets......................................  $329,000    $315,000

  Liabilities
  Short term debt...................................  $ 44,000    $ 44,000
  Accounts Payable..................................    37,000      41,000
  Other accrued liabilities.........................    21,000      24,000

    Total current liabilities.......................  $102,000    $109,000
  Long Term Debt....................................    33,000      46,000

  Total Liabilities.................................  $135,000    $155,000

  Owner's Equity
  Common stock, no par value, 40,000 shares
    authorized 30,000 and 28,000 shares issued
    respectively....................................  $104,000    $ 96,000
  Retained earnings
    Beginning balance...............................  $ 64,000    $ 43,000
    Net income for month............................    36,000      29,000
    Dividends.......................................   (10,000)     (8,000)

    Ending Balance..................................  $ 90,000    $ 64,000

      Total owner's equity..........................  $194,000    $160,000

  Total liabilities and owner's equity..............  $329,000    $315,000
_____________________________________________________________________________

Questions:
 
  a.  Prepare a statement of cash flows that explains the change that
occurred in cash during the month.  You may assume that the change in
each balance sheet amount is due to a single event (e.g., the change
in the amount of production equipment is not the result of both a
purchase and sale of equipment).

  b.  Discuss how the different sections of the Statement of Cash
Flows assist different sets of users.  Also discuss the merits of
using the direct method versus the indirect method of preparation.

Statement of Cash Flows:

Operations:

Net Income $29,000

Additions:
Decrease in Accounts Receivable $11,000
Increase in Accounts Payable $4,000
Increase in Other Liabilities $3,000

Subtractions:
Increase in Merchandise Inventories ($13,000)

Cash Flow from Operations $34,000

Investing:

Proceeds From Sale of Plant and Equipment $11,000

Financing:

Dividends Paid ($8,000)
Proceeds from Long Term Debt Issued $13,000
Stock Buyback ($55,000)

Cash Flow from Financing ($50,000)

Change in Cash for Month ($5,000) = [$34,000 + $11,000 - $50,000]

I calculated the Proceeds From Sale of Plant and Equipment by noting
that the cash received plus the associated decrease in accumulated
depreciation must equal the value of the change in the cost basis of
the Plant and Equipment unless a gain or loss is recorded on the
Income Statement.  Since the problem does not refer to any such gain
or loss, nor does it give any information regarding monthly
depreciation expense incurred, I assumed the Plant and Equipment was
sold at book value.  (Page 343)  Since the result of my assumption
resulted in the correct end of month cash position, I presume it was
correct.

The cost of the Stock Buyback is calculated by combining the change in
Common stock outstanding with the difference between the Retained
Earnings ending balance for the previous month and the current month's
beginning balance.

The direct method lists "... all revenues providing cash, followed by
all expenses using cash."  The indirect method "...begins with net
income, subtracts revenues not providing cash, and adds expenses not
using cash."  "Because the indirect method adds depreciation expense
to net income to calculate cash provided by operations, readers of
financial statements might incorrectly conclude that depreciation
expense provides cash." (Page 186)  "However, ...the recording of
depreciation expense does not affect cash."  (Page 187)

The Statement of Cash Flows provides information about where earnings
are coming from and where cash is generated by a business.  The
Operations section indicates how the ongoing business is performing:
is the company able to collect from its customers, are inventories
rising or falling, and is net cash being generated from the ongoing
activities of the business.  The Investing section reports on whether
or not property and equipment is being bought or sold and in what
amounts.  The Financing section indicates whether the firm is
generating cash from sales of stock or bonds or is using cash to pay
off bonds or repurchase stock.  A firm whose cash position is largely
dependent upon obtaining cash from financing and investing is likely
to be much riskier than a firm that is able to generate significant
cash from operations.

Sincerely,

Wonko

Source: Financial Accounting, sixth edition, by Stickney, Weil, and
Davidson, Harcourt Brace Jovanovich, Inc. (1991)

Great answer...that really helped me understand it better.  Thanks.

You're answers are backwards. Feb. info. is listed first. Example
accounts receivable increased by $11,000, not decreased.