Chapter 13 Statement of Cash Flows

read pp. 658-662, 665-666,677-680

* Classification of Cash Flows as operating,
investing, & financing
 * Identify the basic differences between the
indirect & direct methods for reporting operating
cash flows
 * Preparing the operating activities cash flow
using the indirect method
 * Significant non-cash financing & investing
 activities
 * Ratios
 13-5

Classifications of the Statement of Cash

Flows
Cash inflows and outflows
Operating
directly related to earnings
Activities from normal operations.

Cash inflows and outflows related to

Investing the acquisition or sale of productive
facilities and investments in the
Activities securities of other companies.

Cash inflows and outflows related to

Financing external sources of financing
(owners and creditors) for the
Activities enterprise.
 13-6

CASH INFLOWS
Operating Activities Investing Activities
Sale of operational assets
Cash received Sale of investments
from revenues Collections of loans
Financing Activities
Issuance of stock
Issuance of bonds
and notes

Business

Cash paid for Purchase of operational Payment of dividends

expenses assets
Repurchase of stock
Purchase of investments
Repayment of debt
Loans to others

CASH OUTFLOWS
 13-7

Cash Flows from Operating Activities

Inflows
Inflows
Cash
Cash received
received from:
from:
 Customers
 Customers + Cash
 Dividends
 Dividends and
andinterest
interest on
on Cash
investments
investments Flows
Flows
Outflows
Outflows from
from
Cash
Cash paid
paid for:
for: Operating
Operating
 Purchase
 Purchaseof
of goods
goods for
forresale
resale _ Activities
Activities
and
andservices
services (electricity,
(electricity, etc.)
etc.)
 Salaries
 Salaries and
and wages
wages
 Income
 Incometaxes
taxes
 Interest
 Interest on
onliabilities
liabilities
 13-8

Direct Method vs. Indirect Method

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the cash Starts with

effects of each accrual net
operating activity 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.
 THE BOSTON BEER COMPANY, INC. 13-11
CONSOLIDATED STATEMENT OF CASH FLOWS Boston
Boston
(in thousands) Three months ended Beer
Beer uses
uses
(unaudited) March 27, 2004
Cash flows from operating activities: the
theindirect
indirect
Net income $ 1,271 method.
method.
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,543 The
Theindirect
indirect
Changes in assets and liabilities:
Accounts receivable 861 method
methodisis
Inventory (577) used
usedby
by
Prepaid expense (322)
Accounts payable (52) 98.3%
98.3%of of
Accrued expenses (954) companies.
companies.
Net cash provided by operating activities 2,770
Cash flows for investing activities:
Purchases of property, plant and equipment (2,373) This
This ending
endingcash
cash
Purchase of short-term investments (4,627)
Net cash provided by investing activities (7,000) balance
balanceshould
should
Cash flows from financing activities: agree
agree with
withthe
the
Purchase of treasury stock (4,409)
Proceeds from issuance of stock 5,593 balance
balance sheet.
sheet.
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
 13-16

Reporting Cash Flows from Operating

Activities—Indirect Method
The
The indirect
indirect method
method adjusts
adjusts net
netincome
income by
byeliminating
eliminating
noncash
noncash items.
items.
+/-
+/-Changes
Changesin incurrent
current
assets
assetsand
andcurrent
current
liabilities. Cash
liabilities. CashFlows
Flows
Net
Net from
from Operating
Operating
Income
Income Activities
Activities --
Indirect
Indirect Method
Method
++Losses
Lossesandand ++Noncash
Noncash
--Gains
Gains expenses
expensessuch
suchas as
depreciation
depreciationand
and
amortization.
amortization.
 13-17

Reporting Cash Flows from Operating

Activities—Indirect Method

Change in Account Balance During Year

Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities 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
Use the
the following
following
financial
financial statements
statements for for
The
The Boston
Boston Beer
Beer
Company
Company and and prepare
prepare
the
the Statement
Statement of of Cash
Cash
Flows
Flows for
for the
the quarter
quarter
ended
ended on
on March
March 27,
27,
2004.
2004.
 THE BOSTON BEER COMPANY, INC. 13-19
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Curre nt a ssets:
Cash & ca sh e quiva le nts $ 24,746 $ 27,792 (3,046)
Short-term inve stme nts 19,725 15,098 4,627
Accounts Rece ivable 9,571 10,432 (861)
Inve ntorie s 10,467 9,890 577
Pre pa id e x pe nse s 1,448 1,126 322
Tota l curre nt a ssets 65,957 64,338
Equipm e nt, net 16,889 17,059 (170)
Tota l a sse ts $ 82,846 $ 81,397
LIABILITIES & STOCKHOLDERS' EQUITY
Curre nt lia bilitie s:
Accounts pa ya ble $ 6,343 $ 6,395 (52)
Accrue d e x pe nses 14,550 15,504 (954)
Tota l curre nt lia bilitie s 20,893 21,899
Stockholde rs' Equity:
Contribute d ca pital 24,107 22,923 1,184
Reta ined e a rnings 37,846 36,575 1,271
Tota l stockholde rs' e quity 61,953 59,498
Tota l liabs & stockholde rs' equity $ 82,846 $ 81,397
 13-20
THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Una udite d) Thre e months ende d
In Thousa nds Ma rch 27, 2004
Net sa les $ 44,655
Cost of sa le s 18,073
Gross profit 26,582
Opera ting e xpe nses:
Se lling, ge neral a nd a dministra tive 22,188
De pre ciation a nd amortiza tion 2,543
Total opera ting e x pense s 24,731
Opera ting income 1,851
Intere st income 192
Income be fore provision for income ta xe s 2,043
Provision for income taxe s 772
Ne t incom e $1,271

The
TheStatement
Statement of
of Cash
Cash Flows
Flowswill
willbegin
begin
with
withBoston
BostonBeer’s
Beer’sNet
Net income
incomefrom
fromthe
the
Income
IncomeStatement.
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:
Step
Step 11
Accounts receivable decrease
Inventory increase
861
(577)
Adjust
Adjust net
net income
income for
for
Prepaid expense increase
Accounts payable decrease
(322)
(52)
depreciation
depreciation and
and amortization
amortization
Accrued expenses decrease
Net cash provided by operating activities $
(954)
2,770
expense.
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:
Step
Step 22
Accounts receivable decrease
Inventory increase
861
(577)
Adjust
Adjust net
net income
income forfor changes
changes
Prepaid expense increase
Accounts payable decrease
(322)
(52)
in
in current
current assets
assets and
and current
current
Accrued expenses decrease
Net cash provided by operating activities $
(954)
2,770
liabilities.
liabilities.
(Remember, we showed the comparative balance
sheets a few slides earlier.)
 The Indirect Approach :
(Operating Activities Section)
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

Cha nge i n Account Bal a nce During Ye ar

Incre a se De cre a se
Curre nt Subtra ct from ne t Add to ne t income .
Asse ts income.
Curre nt Add to ne t i ncome . Subtract from net
Li abil itie s i ncome .
 The Direct Approach
( operating activities section)
13-27

THE BOSTON BEER COMPANY, INC.

CONSOLIDATED STATEMENT OF CASH FLOW S
(Una udite d) Thre e m onths e nde d
In thousands Ma rch 27, 2004
Ca sh flows from ope ra ting a ctivitie s:
Ca sh collecte d from custom e rs $ 45,516
Ca sh collecte d from inte rest 192
Ca sh pa yme nts to suppliers (18,702)
Ca sh pa yme nts for ex pe nse s (23,464)
Ca sh pa yme nts for income ta xe s (772)
Ne t ca sh provide d by ope ra ting a ctivitie s $ 2,770

Remember that when we prepared the

operating section using the indirect method,
we also arrived at net cash inflow of $2,770.
 13-9

Cash Flows from Investing Activities

Inflows
Inflows
Cash
Cash received
received from:
from:
 Sale
 Saleor
ordisposal
disposalof
of property,
property,
plant
plant and
andequipment
equipment +
 Sale
 Saleorormaturity
maturityof
of investments
investments
Cash
Cash
in
insecurities
securities Flows
Flows
from
from
Outflows
Outflows Investing
Investing
Cash
Cash paid
paid for:
for: _ Activities
Activities
 Purchase
 Purchaseof
of property,
property, plant
plant and
and
equipment
equipment
 Purchase
 Purchaseof of investments
investmentsin
in
securities
securities
 13-10

Cash Flows from Financing Activities

Inflows
Inflows
Cash
Cash received
received from:
from:
 Borrowings
 Borrowingson
onnotes,
notes,
mortgages,
mortgages,bonds,
bonds, etc.
etc.from
from
creditors + Cash
creditors Cash
 Issuing
 Issuingstock
stockto
toowners
owners Flows
Flows
Outflows
Outflows
from
from
Cash
Cash paid
paid for:
for: Financing
Financing
 Repayment
 Repayment of
of principal
principal to
to _ Activities
Activities
creditors
creditors(excluding
(excludinginterest,
interest,
which
whichisis an
anoperating
operatingactivity)
activity)
 Repurchasing
 Repurchasingstock
stockfrom
from
owners
owners
 Dividends
 Dividendsto toowners
owners
 Additional Disclosures
( #1 below is required if using the “direct method”, # 2 & #3
apply to both direct & indirect methods )
13-43

Additional Cash Flow Disclosures

Required
Required Supplemental
Supplemental Information
Information
1.
1. Reconciliation
Reconciliation of
of net
net income
income to
to cash
cash flow
flow
from
from operations.
operations.
2.
2. Cash
Cash paid
paid for
for income
income taxes
taxes and
and interest.
interest.
3.
3. Significant
Significant noncash
noncash investing
investing and
and
financing
financing activities.
activities.
Significant noncash investing and financing
transactions do not involve cash.
Example: Purchase of a building with a mortgage.
 Free Cash Flow
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.
 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.
 Capital Acquisition Ratio
13-36

Capital Acquisition Ratio

Capital
Acquisition = Cash Flow from Operating Activities
Ratio 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.
 End of Chapter MC Answers
 1. b)
 2. d)
 3. d)
 4. a)
 5. a)
 6. b)
 7. d)
 8. a)
 9. d)
 10. c)
 Homework Manager Assignment

 E13-3
 E13-7
 E13-14
 E13-15
 E13-17