Transcript Slide 1

Statement of
Cash Flows
Chapter 13
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
13-2
Understanding the Business
Positive cash flows permit a company to . . .
Pay
dividends to
owners.
Take advantage
of market
opportunities.
Expand its
operations.
Replace needed
assets.
Wall Street analysts consider cash flow an
important indicator of a company’s financial
health.
13-3
Learning Objectives
Classify cash flow statement items as part of
net cash flows from operating, investing, and
financing activities.
13-4
Classifications of the Statement of Cash
Flows
Cash
Equivalents

Cash
Currency
Short-term, highly liquid investments.
 Readily convertible into cash.
 So near maturity that market value is unaffected by
interest rate changes (i.e., less than 3 months to
maturity).
13-5
Classifications of the Statement of Cash
Flows
Operating
Activities
Cash inflows and outflows
directly related to earnings
from normal operations.
Investing
Activities
Cash inflows and outflows related to
the acquisition or sale of productive
facilities and investments in the
securities of other companies.
Financing
Activities
Cash inflows and outflows related to
external sources of financing
(owners and creditors) for the
enterprise.
13-6
CASH INFLOWS
Operating Activities
Cash received
from revenues
Investing Activities
Sale of operational assets
Sale of investments
Collections of loans
Financing Activities
Issuance of stock
Issuance of bonds
and notes
Business
Cash paid for
expenses
Purchase of operational
assets
Purchase of investments
Loans to others
CASH OUTFLOWS
Payment of dividends
Repurchase of stock
Repayment of debt
13-7
Cash Flows from Operating Activities
Inflows
Cash received from:

Customers
 Dividends and interest on
investments
+
Outflows
Cash paid for:




Purchase of goods for resale
and services (electricity, etc.)
Salaries and wages
Income taxes
Interest on liabilities
_
Cash
Flows
from
Operating
Activities
13-8
Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Direct Method
Indirect Method
Reports the cash
effects of each
operating activity
Starts with
accrual net
income and
converts to cash
basis
Note that no matter which format is used, the same amount of net
cash flows from operating activities is generated.
13-9
Cash Flows from Investing Activities
Inflows
Cash received from:


Sale or disposal of property,
plant and equipment
Sale or maturity of investments
in securities
Outflows
Cash paid for:


Purchase of property, plant and
equipment
Purchase of investments in
securities
+
_
Cash
Flows
from
Investing
Activities
13-10
Cash Flows from Financing Activities
Inflows
Cash received from:


Borrowings on notes,
mortgages, bonds, etc. from
creditors
Issuing stock to owners
+
Outflows
Cash paid for:



Repayment of principal to
creditors (excluding interest,
which is an operating activity)
Repurchasing stock from
owners
Dividends to owners
_
Cash
Flows
from
Financing
Activities
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three months ended
(unaudited)
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable
861
Inventory
(577)
Prepaid expense
(322)
Accounts payable
(52)
Accrued expenses
(954)
Net cash provided by operating activities
2,770
Cash flows for investing activities:
Purchases of property, plant and equipment
(2,373)
Purchase of short-term investments
(4,627)
Net cash provided by investing activities
(7,000)
Cash flows from financing activities:
Purchase of treasury stock
(4,409)
Proceeds from issuance of stock
5,593
Net cash used in financing activities
1,184
Net increase (decrease) in cash & cash equivalents
(3,046)
Cash & cash equivalents at beginning of period
27,792
Cash & cash equivalents at end of period
$
24,746
Boston
Beer uses
the indirect
method.
13-11
The indirect
method is
used by
98.3% of
companies.
This ending cash
balance should
agree with the
balance sheet.
13-12
Relationships to the Balance Sheet and the
Income Statement



Information needed to prepare a
statement of cash flows:
Comparative Balance Sheets.
Income Statement.
Additional details concerning selected
accounts.
13-13
Relationships to the Balance Sheet and the
Income Statement
 Cash = Liabilities Stockholders’
Equity Noncash Assets
Derives from . . .
Assets = Liabilities Stockholders’ Equity
13-14
Relationships to the Balance Sheet and the
Income Statement
Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category
Transactions
Cash Effect Other Account Affected
Operating Collect accounts receivable
+Cash
-Accounts Receivable (A)
Pay accounts payable
-Cash
-Accounts Payable (L)
Prepay rent
-Cash
+Prepaid Rent (A)
Pay interest
-Cash
-Retained Earnings (SE)
Sale for cash
+Cash
+Retained Earnings (SE)
Investing Purchase equipment for cash
-Cash
+Equipment (A)
Sell investment securities for cash
+Cash
-Investments (A)
Financing Pay back debt to bank
-Cash
-Notes Payable-Bank (L)
+Common Stock and
Paid-in-Capital (SE)
Issue stock for cash
+Cash
13-15
Learning Objectives
Report and interpret cash flows from operating
activities using the indirect method.
13-16
Reporting Cash Flows from Operating
Activities—Indirect Method
The indirect method adjusts net income by eliminating
noncash items.
+/- Changes in current
assets and current
liabilities.
Net
Income
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization.
Cash Flows
from Operating
Activities Indirect Method
13-17
Reporting Cash Flows from Operating
Activities—Indirect Method
Current
Assets
Current
Liabilities
Change in Account Balance During Year
Increase
Decrease
Subtract from net
Add to net income.
income.
Add to net income.
Subtract from net
income.
Use this table when adjusting Net Income
to Operating Cash Flows using the
indirect method.
13-18
Reporting Cash Flows from Operating
Activities—Indirect Method
Use the following
financial statements for
The Boston Beer
Company and prepare
the Statement of Cash
Flows for the quarter
ended on March 27,
2004.
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
In Thousands
ASSETS
Current assets:
Cash & cash equivalents
Short-term investments
Accounts Receivable
Inventories
Prepaid expenses
Total current assets
Equipment, net
Total assets
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Stockholders' Equity:
Contributed capital
Retained earnings
Total stockholders' equity
Total liabs & stockholders' equity
March 27,
2004
13-19
Dec. 27,
2003
Changes
$ 24,746 $ 27,792
19,725
15,098
9,571
10,432
10,467
9,890
1,448
1,126
65,957
64,338
16,889
17,059
$ 82,846 $ 81,397
(3,046)
4,627
(861)
577
322
$ 6,343 $ 6,395
14,550
15,504
20,893
21,899
(52)
(954)
24,107
37,846
61,953
$ 82,846 $
1,184
1,271
22,923
36,575
59,498
81,397
(170)
13-20
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three months ended
In Thousands
March 27, 2004
Net sales
$
44,655
Cost of sales
18,073
Gross profit
26,582
Operating expenses:
Selling, general and administrative
22,188
Depreciation and amortization
2,543
Total operating expenses
24,731
Operating income
1,851
Interest income
192
Income before provision for income taxes
2,043
Provision for income taxes
772
Net income
$1,271
The Statement of Cash Flows will begin
with Boston Beer’s Net income from the
Income Statement.
13-21
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
In thousands
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable decrease
861
Inventory increase
(577)
Prepaid expense increase
(322)
Accounts payable decrease
(52)
Accrued expenses decrease
(954)
Net cash provided by operating activities
$
2,770
Step 1
Adjust net income for
depreciation and amortization
expense.
13-22
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
In thousands
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable decrease
861
Inventory increase
(577)
Prepaid expense increase
(322)
Accounts payable decrease
(52)
Accrued expenses decrease
(954)
Net cash provided by operating activities
$
2,770
Step 2
Adjust net income for changes
in current assets and current
liabilities.
(Remember, we showed the comparative balance
sheets a few slides earlier.)
13-23
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
In thousands
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable decrease
861
Inventory increase
(577)
Prepaid expense increase
(322)
Accounts payable decrease
(52)
Accrued expenses decrease
(954)
Net cash provided by operating activities
$
2,770
Current
Assets
Current
Liabilities
Change in Account Balance During Year
Increase
Decrease
Subtract from net
Add to net income.
income.
Add to net income.
Subtract from net
income.
13-24
Learning Objectives
Report and interpret cash flows from operating
activities using the direct method.
13-25
Reporting Cash Flows from Operating
Activities—Direct Method
Sales revenue
+ Decrease in accounts receivable
- Increase in accounts receivable
= Cash collected from customers
Interest/Dividend revenue
+ Decrease in interest/dividends
receivable
- Increase in interest/dividends
receivable
= Collections of interest/dividends
on investments
+
+
=
Cost of goods sold
Increase in inventory
Decrease in inventory
Increase in accounts payable
Decrease in accounts payable
Cash payments to suppliers
+
+
=
Other expenses
Increase in prepaid expenses
Decrease in prepaid expenses
Increase in accrued expenses
Decrease in accrued expenses
Cash paid for expenses
+
+
=
Income tax expense
Increase in prepaid income taxes
Decrease in prepaid income taxes
Increase in income taxes payable
Decrease in income taxes payable
Payments of income taxes
13-26
Reporting Cash Flows from Operating
Activities—Direct Method
$ 44,655
861
n/a
$ 45,516
Sales revenue
Decrease in accounts receivable
Increase in accounts receivable
Cash collected from customers
$ 192 Interest/Dividend revenue
n/a Decrease in interest/dividends
receivable
n/a Increase in interest/dividends
receivable
$ 192 Collections of interest/dividends
on investments
$ 18,073
577
n/a
n/a
52
$ 18,702
Cost of goods sold
Increase in inventory
Decrease in inventory
Increase in accounts payable
Decrease in accounts payable
Cash payments to suppliers
$ 22,188
322
n/a
n/a
954
$ 23,464
$ 772
n/a
n/a
n/a
n/a
$ 772
Other expenses
Increase in prepaid expenses
Decrease in prepaid expenses
Increase in accrued expenses
Decrease in accrued expenses
Cash paid for expenses
Income tax expense
Increase in prepaid income taxes
Decrease in prepaid income taxes
Increase in income taxes payable
Decrease in income taxes payable
Payments of income taxes
13-27
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
In thousands
March 27, 2004
Cash flows from operating activities:
Cash collected from customers
$
45,516
Cash collected from interest
192
Cash payments to suppliers
(18,702)
Cash payments for expenses
(23,464)
Cash payments for income taxes
(772)
Net cash provided by operating activities
$
2,770
Remember that when we prepared the
operating section using the indirect method,
we also arrived at net cash inflow of $2,770.
13-28
Interpreting Cash Flows from Operating
Activities
Accounts
Receivable
Changes
Managers sometimes attempt to
boost declining sales by extending
credit terms or by lowering credit
standards. The resulting increase in
accounts receivable can cause net
income to outpace cash flows from
operations.
Inventory
Changes
Inventory growth can be a sign that
planned sales growth did not
materialize. A decline in inventory
can be a sign that the company is
anticipating lower sales in the next
quarter.
13-29
Learning Objectives
Analyze and interpret the quality of income
ratio.
13-30
Quality of Income Ratio
Quality of = Cash Flow from Operating Activities
Income Ratio
Net Income
In general, this ratio measures the portion of
income that was generated in cash. All other
things equal, a higher quality of income ratio
indicates greater ability to finance operating
and other cash needs from operating cash
inflows.
13-31
Learning Objectives
Report and interpret cash flows from investing
activities.
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
In Thousands
ASSETS
Current assets:
Cash & cash equivalents
Short-term investments
Accounts Receivable
Inventories
Prepaid expenses
Total current assets
Equipment, net
Total assets
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Stockholders' Equity:
Contributed capital
Retained earnings
Total stockholders' equity
Total liabs & stockholders' equity
March 27,
2004
13-32
Dec. 27,
2003
$ 24,746 $ 27,792
19,725
15,098
9,571
10,432
10,467
9,890
1,448
1,126
65,957
64,338
16,889
17,059
$ 82,846 $ 81,397
$ 6,343 $ 6,395
14,550
15,504
20,893
21,899
24,107
37,846
61,953
$ 82,846 $
22,923
36,575
59,498
81,397
Changes
(3,046)
4,627
(861)
577
322
(170)
Here is
the
balance
sheet
we
looked
at
earlier.
Let’s focus
on the
(52)
investing
(954)
accounts.
1,184
1,271
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three months ended
(unaudited)
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable
861
Inventory
(577)
Prepaid expense
(322)
Accounts payable
(52)
Accrued expenses
(954)
Net cash provided by operating activities
2,770
Cash flows for investing activities:
Purchases of property, plant and equipment
(2,373)
Purchase of short-term investments
(4,627)
Net cash provided by investing activities
(7,000)
Cash flows from financing activities:
Purchase of treasury stock
(4,409)
Proceeds from issuance of stock
5,593
Net cash used in financing activities
1,184
Net increase (decrease) in cash & cash equivalents
(3,046)
Cash & cash equivalents at beginning of period
27,792
Cash & cash equivalents at end of period
$
24,746
13-33
The balance sheet
indicates that
Equipment
decreased by $170
during the quarter.
If you had access to
additional company
information, you
would discover that
the company
purchased $2,373 of
new equipment.
This is offset by
$2,543 in
depreciation
expense (see the
Cash Flows from
Operating
Activities).
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three months ended
(unaudited)
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable
861
Inventory
(577)
Prepaid expense
(322)
Accounts payable
(52)
Accrued expenses
(954)
Net cash provided by operating activities
2,770
Cash flows for investing activities:
Purchases of property, plant and equipment
(2,373)
Purchase of short-term investments
(4,627)
Net cash provided by investing activities
(7,000)
Cash flows from financing activities:
Purchase of treasury stock
(4,409)
Proceeds from issuance of stock
5,593
Net cash used in financing activities
1,184
Net increase (decrease) in cash & cash equivalents
(3,046)
Cash & cash equivalents at beginning of period
27,792
Cash & cash equivalents at end of period
$
24,746
13-34
Short-term
investments
increased by
$4,627 during
the quarter.
Although
short-term
investments is
a current asset,
it is reported in
the investing
section on the
statement of
cash flows.
13-35
Learning Objectives
Analyze and interpret the capital acquisition
ratio.
13-36
Capital Acquisition Ratio
Capital
Acquisition
Ratio
= Cash Flow from Operating Activities
Cash Paid for Property, Plant,
and Equipment
In general, this ratio reflects the portion
of purchases of property, plant and
equipment financed from operating
activities. A high ratio indicates less
need for outside financing for current
and future expansions.
13-37
Free Cash Flow
Cash Flow from Operating Activities – Dividends –
Capital Expenditures
In general, this measures a firm’s ability
to pursue long-term investment
opportunities.
13-38
Learning Objectives
Report and interpret cash flows from financing
activities.
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
In Thousands
ASSETS
Current assets:
Cash & cash equivalents
Short-term investments
Accounts Receivable
Inventories
Prepaid expenses
Total current assets
Equipment, net
Total assets
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Stockholders' Equity:
Contributed capital
Retained earnings
Total stockholders' equity
Total liabs & stockholders' equity
March 27,
2004
13-39
Dec. 27,
2003
$ 24,746 $ 27,792
19,725
15,098
9,571
10,432
10,467
9,890
1,448
1,126
65,957
64,338
16,889
17,059
$ 82,846 $ 81,397
$ 6,343 $ 6,395
14,550
15,504
20,893
21,899
24,107
37,846
61,953
$ 82,846 $
22,923
36,575
59,498
81,397
Changes
(3,046)
4,627
(861)
577
322
(170)
Here is
the
balance
sheet
we
looked
at
earlier.
Let’s focus
on the
(52)
(954) financing
account.
1,184
1,271
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three months ended
(unaudited)
March 27, 2004
Cash flows from operating activities:
Net income
$
1,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
2,543
Changes in assets and liabilities:
Accounts receivable
861
Inventory
(577)
Prepaid expense
(322)
Accounts payable
(52)
Accrued expenses
(954)
Net cash provided by operating activities
2,770
Cash flows for investing activities:
Purchases of property, plant and equipment
(2,373)
Purchase of short-term investments
(4,627)
Net cash provided by investing activities
(7,000)
Cash flows from financing activities:
Purchase of treasury stock
(4,409)
Proceeds from issuance of stock
5,593
Net cash used in financing activities
1,184
Net increase (decrease) in cash & cash equivalents
(3,046)
Cash & cash equivalents at beginning of period
27,792
Cash & cash equivalents at end of period
$
24,746
13-40
The net increase in
Contributed Capital
of $1,184 was
caused by two
transactions.
First, Boston Beer
repurchased $4,409
of outstanding
stock, which is a
cash outflow.
Second, the
company issued
common stock to
employees for
$5,593, which is a
cash inflow.
13-41
Interpreting Cash Flows from Financing
Activities
The long-term growth of a company is
normally financed from three sources:
internally generated funds, the issuance
of stock, and money borrowed on a longterm basis.
The statement of cash flows shows how
management has elected to fund its growth.
This information is used by analysts who wish to
evaluate the capital structure and growth
potential of a business.
13-42
Learning Objectives
Explain the impact of additional cash flow
disclosures.
13-43
Additional Cash Flow Disclosures
Required Supplemental Information
1. Reconciliation of net income to cash flow
from operations.
2. Cash paid for income taxes and interest.
3. Significant noncash investing and
financing activities.
Significant noncash investing and financing
transactions do not involve cash.
Example: Purchase of a building with a mortgage.
13-44
Chapter Supplement A
Adjustment for Gains and Losses:
Indirect Method
13-45
Adjustment for Gains and Losses
Transactions that cause gains and losses should be
classified on the cash flow statement as operating,
investing, or financing activities, depending on their
dominate characteristics. For example, if the sale of
equipment produced a gain, it would be classified as an
investing activity.
Gains
Gains must be subtracted from net
income to avoid double counting the
gain.
Losses
Losses must be added to net income
to avoid double counting the loss.
13-46
Chapter Supplement B
Spreadsheet Approach—Statement of
Cash Flows: Indirect Method
13-47
Spreadsheet Approach
The spreadsheet approach offers a
systematic way to keep track of data. A
spreadsheet is organized as follows:
1. Four columns to record dollar amounts are
established (beginning balance, debit changes,
credit changes, and ending balance).
2. On the far left of the top half of the spreadsheet,
each account name from the balance sheet is
entered.
3. On the far left of the top half of the spreadsheet,
the name of each item that will be reported on
the statement of cash flows is entered.
BOSTON BEER COMPANY
13-48
Changes
Dec. 31,
2003
Debits
Balance Sheet
Assets:
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Equipment, net
27,792
15,098 (k)
10,432
9,890 (e)
1,126 (f)
17,059 (i)
Accounts payable
Accrued expenses
Contributed capital
Retained earnings
6,395 (g)
15,504 (h)
22,923 (l)
36,575
Statement of Cash Flows
Cash flows from operating activities:
Net income
Adj. to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Changes in assets and liabilities:
Accounts receivable
Inventory
Prepaid expense
Accounts payable
Accrued expenses
Net cash provided by operating activities
Cash flows for investing activities:
Purchases of property, plant and equipment
Purchase of short-term investments
Net cash provided by investing activities
Cash flows from financing activities:
Purchase of treasury stock
Proceeds from issuance of stock
Net cash used in financing activities
Net decrease in cash & cash equivalents
Totals
Credits
Mar. 27,
2004
(n)
3,046
(d)
861
577
322
2,373 (b)
2,543
24,746
19,725
9,571
10,467
1,448
16,889
5,593
1,271
6,343
14,550
24,107
37,846
4,627
52
954
4,409 (m)
(a)
Inflows
(a)
1,271
(b)
2,543
(d)
861
Outflows
(e)
(f)
(g)
(h)
Subtotals
577
322
52
954
2,770
(i)
(k)
2,373
4,627
(7,000)
(l)
(m)
4,409
5,593
1,184
(n)
3,046
26,628
26,628
(3,046)
After entering all
the transactions
illustrated in the
textbook, this is
what the
spreadsheet
looks like.
13-49
End of Chapter 13