Although we could begin to analyze our "basic" sources and uses statement right now, a few minor adjustments will provide us with an even more useful statement with which to work. We will want to better explain the change in retained earnings and that in net fixed assets. We purposely separated these two items from all the rest. Once we give a more detailed explanation of these two net changes, the rest will remain virtually untouched.
Recognize Profits and Dividends. So far our funds statement reflects only the net chans in the retained earnings account. Profits earned and dividends paid have netted out to pre duce this figure. The individual components are important funds flows and need to be show: separately, however. Making use of the firm's earnings statement to get the needed figures, u simply delete the net change in retained earnings and substitute its components in our fundstatement - net profit as a source of funds and cash dividends as a use of funds. Giving individual recognition to profits (or losses) and dividends paid provides importar, added funds detail with a minimum of effort.
Source: Net profit $201
Less Use: Cash dividends $143
(Net) Source: Increase, retained earnings $58
Recognize Depreciation and Gross Change in Fixed Assets. Depreciation is a bookeeping entry that allocates the cost of assets against income but does not involve any mov. ment of capital. This noncash expense actually helps conceal the full operating funds tV-from us. What we really want to know is something called funds provided by operations - something usually not expressed directly on the income statement. To find it, we must ad.
back depreciation to net profit.' "We should keep in mind that depreciation does not real, create funds; funds are generated from operations. But we need to add it back to net incoir.. to reverse the effect of the accounting entry that originally removed it. So although we will depreciation as a source under net income, it is there more as a reversing entry than as a re: source of funds in its own right.
Besides helping us derive funds provided by operations, adding back depreciation as a sour of funds allows us to explain the gross additions (or reductions) to fixed assets as opposed merely the change in net fixed assets. First, we need the change in net fixed assets from the "basic" sources and uses statement. Then we need to retrieve the depreciatior figure found on Aldine's earnings statement. From this data w compute gross additions (or reductions) to fixed assets in the following manner:
Gross additions to fixed assets = Increase (decrease) in net fixed assets + Depreciation during period
Therefore, for Aldine we have (in thousands)
Gross additions to fixed assets = -$8 + $112 = $104
So we conclude:
Source: Depreciation $ 112
Less Use: Additions to fixed assets 104
(Net) Source: Decrease, net fixed assets $_8
Once depreciation is added to the funds statement as a source and additions to fixed asse: is shown as a use, we can remove the change in net fixed assets because it is no longer needec The decrease in net fixed assets of $8,000 has been more fully explained as being the net resur of the addition of $104,000 in new assets and depreciation charges of $112,000.
Shows a finalized sources and uses of funds statement for the Aldine Company. When we compare it with, the funds statement based solely on balance sheet changes, we see that changes in two balance sheet items - retained earnings and net fixed assets - have been replaced by their earnings-statement-derived components. And, as a result of this full explanation, the sources and uses totals, though still in balance, have increased to $510,000.