Transcript Name of Chapter

Statement of Cash Flows
Chapter 13
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
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.
McGraw-Hill/Irwin
Slide 2
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
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
McGraw-Hill/Irwin
+
_
Cash
Flows
from
Operating
Activities
Slide 4
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.
McGraw-Hill/Irwin
Slide 5
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
McGraw-Hill/Irwin
+
_
Cash
Flows
from
Investing
Activities
Slide 6
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
McGraw-Hill/Irwin
_
Cash
Flows
from
Financing
Activities
Slide 7
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three months ended
(unaudited)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
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
Proceeds from disposal of property,
plant & 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 increase (decrease) in cash & cash equivalents
Cash & cash equivalents at beginning of period
Cash & cash equivalents at end of period
March 31, 2007
$
5,768
1,726
(1,967)
(1,917)
(1,677)
(3,320)
(744)
(2,131)
(1,736)
2
(802)
(2,536)
$
(2,729)
5,698
2,969
(1,698)
63,147
61,449
Boston Beer
uses the
indirect
method.
The indirect
method is
used by
98.3% of
companies.
This ending cash
balance should
agree with the
balance sheet.
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.
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
McGraw-Hill/Irwin
Cash Flows
from Operating
Activities Indirect Method
+ Noncash
expenses such as
depreciation and
amortization.
Slide 10
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.
McGraw-Hill/Irwin
Slide 11
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.
McGraw-Hill/Irwin
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.
Slide 12
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 long-term 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.
McGraw-Hill/Irwin
Slide 13
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.
McGraw-Hill/Irwin
Slide 14
End of Chapter 13
© 2009 The McGraw-Hill Companies, Inc.