of Statement Cash Flows Statement
Chapter 13
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2009 The McGraw-Hill Companies, Inc.
Statement Of Cash Flows
Overview
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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
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Cash Flows from Operating Activities
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Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Direct Method Reports the cash effects of each operating activity
Indirect Method 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.
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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
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Cash Flows from Investing Activities
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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
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Cash Flows from Financing Activities
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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
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.
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
$
Statement Of Cash Flows
Developing the Statement Think of it as a process with several steps.
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Preparing the Cash Flow Statement
Step 1: Gather Information
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Preparing the Cash Flow Statement Step 1 Information needed to prepare a statement of cash flows: Comparative Balance Sheets (2 years: Current and Previous). Income Statement (current year). Additional details concerning selected accounts (mainly depreciation).
Preparing the Cash Flow Statement
Step 2: Subtract current year balance sheet amounts from previous year balances. Account totals only not subtotals.
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THE BOSTON BEER COMPANY, INC. CONSOLIDATED BALANCE SHEET
(Unaudited) In Thousands
March 31, 2007
Dec. 30, 2006
Changes
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 expenses Accrued Total current liabilities Stockholders' Equity: Contributed capital Retained earnings Total stockholders' equity Total liabs & stockholders' equity
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$
$
61,449 $ 20,025 19,737 18,951 4,398 124,560 31,887 156,447 $
63,147 19,223 17,770 17,034 2,721 119,895 31,879 151,774
(1,698) 802 1,967 1,917 1,677 8
$
14,622 $ 22,184 36,806 84,206 35,435 119,641 156,447 $
17,942 22,928 40,870 81,237 29,667 110,904 151,774
(3,320) (744)
2,969 5,768
$
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Preparing the Cash Flow Statement
Step 3: Tag each balance sheet account as to where it will appear in the Cash Flow Statement. O for Operating F for Finance I for Investing
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Preparing the Cash Flow Statement Step 3
Main Accounts Operating: A/R, Inventory, Prepaid Expenses, Accrued Expense Payables, Accumulated Depreciation (Depreciation Expense) Investing: Investments, Property, Plant, & Equipment Financing: Notes or Bonds Payable, Commons Stock (Contributed Capital)
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Preparing the Cash Flow Statement Step 3
Main Accounts Some accounts impact two sections of the Cash Flow statement: Retained Earnings: Net Income Operating Dividends Financing
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Preparing the Cash Flow Statement
Step 3: Tag each balance sheet account: Outflow: Outflow of Cash Inflow: Inflow of Cash
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Impact on Cash Flow
Assets
Outflow: Inflow:
increases in asset accounts decreases in asset accounts
Liabilities
Outflow:
& Equity Accounts
decrease in liabilities and increases in liabilities and
equity Inflow: equity
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Preparing the Cash Flow Statement
Step 5: Calculate the Operating Sections Think of it as a formula
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Preparing the Cash Flow Statement Step 5
The indirect method adjusts net income by eliminating noncash items.
+/- Changes in current assets and current liabilities. Those marked as Operating in Step 3 (5C).
Net Income (5A)
+Add back: Noncash expenses such as depreciation and amortization. (5B)
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Cash Flows from Operating Activities Indirect Method
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The Statement of Cash Flows will begin with Boston Beers Net income from the Income Statement (5A).
Adjust net income for depreciation by adding it back (5B) .
Adjust net income for changes in current assets and current liabilities (5C).
(Remember, we showed the comparative balance sheets a few slides earlier.)
Preparing the Cash Flow Statement Step 5
Use this table when adjusting Net Income Use to Operating Cash Flows using the indirect method. indirect
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Preparing the Cash Flow Statement
Step 6: Calculate the Investing Section
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Impact on Cash Flow
Assets
Outflow: Inflow:
increases in asset accounts decreases in asset accounts
Liabilities
Outflow:
& Equity Accounts
decrease in liabilities and increases in liabilities and
equity Inflow: equity
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Preparing the Cash Flow Statement
Step 7: Calculate the Financing Section
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Impact on Cash Flow
Assets
Outflow: Inflow:
increases in asset accounts decreases in asset accounts
Liabilities
Outflow:
& Equity Accounts
decrease in liabilities and increases in liabilities and
equity Inflow: equity
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Preparing the Cash Flow Statement
Step 8: Check: Operating + Investing + Financing must = Change in cash
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Additional Cash Flow Disclosures Required Supplemental Information 1.Cash paid for income taxes and interest. 2. Significant noncash investing and financing activities. Significant noncash investing and financing transactions do not involve cash. Example: Purchase of a building with a mortgage.
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