chapter 13 statement of cash flows. © 2004 the mcgraw-hill companies mcgraw-hill/irwin 13-2...

Chapter 13

Statement of Cash Flows

© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin

13-2

Business Background

Positive cash flows permit a company to . . .

Expand its operations.Expand its operations.

Replace needed assets.

Replace needed assets.

Take advantage of market

opportunities.

Take advantage of market

opportunities.

Pay dividends to

owners.

Pay dividends to

owners.

Wall Street analysts consider cash flow an important indicator of a company’s financial

health.

Wall Street analysts consider cash flow an important indicator of a company’s financial

health.

© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin

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CashCashCurrency

Cash Equivalents

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes.

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes.

Classifications on the Statement of Cash Flows

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Classifications on the Statement of Cash Flows

The SCF must include the following three sections, as defined in FASB

Statement 95:Operating Activities Investing ActivitiesFinancing Activities

The SCF must include the following three sections, as defined in FASB

Statement 95:Operating Activities Investing ActivitiesFinancing Activities

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Boston Beer uses the indirect

method.

Boston Beer uses the indirect

method.

The indirect method is used by 98.3% of

companies.

The indirect method is used by 98.3% of

companies.

Statement continued . . .

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This ending cash

balance should

agree with the balance

sheet.

This ending cash

balance should

agree with the balance

sheet.

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Cash Flows from Operating Activities

Cash inflows and outflows that directly

relate to income from normal

operations reported on the income

statement.

Cash inflows and outflows that directly

relate to income from normal

operations reported on the income

statement.

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13-8

Outflows to: Purchase of goods for resale

and services. Salaries and wages. Income taxes. Interest on liabilities.

Outflows to: Purchase of goods for resale

and services. Salaries and wages. Income taxes. Interest on liabilities.

Inflows from: Sales to customers. Interest and dividends

received.

Inflows from: Sales to customers. Interest and dividends

received.

Cash Flows from Operating Activities

Cash Flows from

Operating Activities

Cash Flows from

Operating Activities

+

_

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Cash Flows from Operating Activities - Indirect Method

Net Income

Net Income

Cash Flows from Operating

Activities - Indirect Method

Cash Flows from Operating

Activities - Indirect Method

Changes in current assets and current liabilities.

Changes in current assets and current liabilities.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.

The indirect method adjusts net income by eliminating noncash items.

The indirect method adjusts net income by eliminating noncash items.

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Cash Flows from

Investing Activities

Cash Flows from

Investing Activities

+

_

Cash Flows from Investing Activities

Inflows from: Sale or disposal of property,

plant, and equipment. Sale or maturity of investments

in securities.

Inflows from: Sale or disposal of property,

plant, and equipment. Sale or maturity of investments

in securities.

Outflows to: Purchase property, plant, and

equipment. Purchase investments in

securities.

Outflows to: Purchase property, plant, and

equipment. Purchase investments in

securities.

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Cash Flows from

Financing Activities

Cash Flows from

Financing Activities

+

_

Cash Flows from Financing Activities

Inflows from: Borrowing on notes,

mortgages, bonds, etc. from creditors.

Issuing stock to owners.

Inflows from: Borrowing on notes,

mortgages, bonds, etc. from creditors.

Issuing stock to owners.

Outflows to: Repay principal to creditors

(excluding interest). Repurchase stock from owners. Dividends to owners.

Outflows to: Repay principal to creditors

(excluding interest). Repurchase stock from owners. Dividends to owners.

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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.

Information needed to prepare a statement of cash flows:

Comparative Balance Sheets.Income Statement.

Additional details concerning selected accounts.

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Relationships to the Balance Sheet and the Income Statement

Cash = Liabilities Stockholders’ Equity Noncash Assets

Cash = Liabilities Stockholders’ Equity Noncash Assets

Derives from . . .

Assets = Liabilities Stockholders’ Equity

Assets = Liabilities Stockholders’ Equity

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Use this table when adjusting Net Income Use this table when adjusting Net Income to Operating Cash Flows using the to Operating Cash Flows using the

indirect methodindirect method..

Relationships to the Balance Sheet and the Income Statement

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Use the following financial

statements for The Boston Beer

Company and prepare the

Statement of Cash Flows for the

quarter ended on March 25, 2000.

Use the following financial

statements for The Boston Beer

Company and prepare the

Statement of Cash Flows for the

quarter ended on March 25, 2000.

Statement of Cash Flows Indirect Method Example

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The Statement of Cash Flows will begin with Boston Beer’s

Net income from the Income

Statement.

The Statement of Cash Flows will begin with Boston Beer’s

Net income from the Income

Statement.

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Next, adjust for the non-cash items included in net income.

For Boston Beer, the only non-cash adjustment is for depreciation expense ($1,408).

Since this number is not obvious in the Income Statement provided, it must be derived from other

sources, such as the Notes to the Financial Statements or the General Ledger Trial Balance.

Next, adjust for the non-cash items included in net income.

For Boston Beer, the only non-cash adjustment is for depreciation expense ($1,408).

Since this number is not obvious in the Income Statement provided, it must be derived from other

sources, such as the Notes to the Financial Statements or the General Ledger Trial Balance.

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To complete the Cash flows from operating activities section, you must examine comparative balance

sheets to determine the changes in current assets and current liabilities from the beginning of the period to

the end of the period.

To complete the Cash flows from operating activities section, you must examine comparative balance

sheets to determine the changes in current assets and current liabilities from the beginning of the period to

the end of the period.

(Remember, we showed the balance sheets a few slides earlier.)

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Statement continued . . .

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13-23

The balance sheet indicates that Equipment decreased by $115 during the quarter.

If you had access to additional company information, you would discover that the

company sold equipment with a book value of $222 and purchased $1,515 of new equipment. This is offset by $1,408 in

depreciation expense (see the Cash Flows from Operating Activities).

The balance sheet indicates that Equipment decreased by $115 during the quarter.

If you had access to additional company information, you would discover that the

company sold equipment with a book value of $222 and purchased $1,515 of new equipment. This is offset by $1,408 in

depreciation expense (see the Cash Flows from Operating Activities).

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Short-term investments decreased by a net $3,169 during the quarter.

Further investigation of the accounting records reveals that Boston Beer sold short-term investments for $16,500 and purchased

short-term investments for $13,331.

Short-term investments decreased by a net $3,169 during the quarter.

Further investigation of the accounting records reveals that Boston Beer sold short-term investments for $16,500 and purchased

short-term investments for $13,331.

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Contributed Capital decreased by a net $5,786. Boston Beer repurchased $5,801 of outstanding stock, which is a cash outflow. The company also issued capital stock

to employees for $15, which is a cash inflow.

Contributed Capital decreased by a net $5,786. Boston Beer repurchased $5,801 of outstanding stock, which is a cash outflow. The company also issued capital stock

to employees for $15, which is a cash inflow.

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Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.

Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.

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Required Supplemental Information:

1. Cash paid for taxes and interest.

2. Significant non-cash investing and financing activities.

Required Supplemental Information:

1. Cash paid for taxes and interest.

2. Significant non-cash investing and financing activities.

© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin

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A Comparison of the Direct and Indirect Methods

• Net cash flow is the same for both methods. • The direct method provides more detail

about cash from operating activities.• The investing and financing sections for the

two methods are identical.

• Net cash flow is the same for both methods. • The direct method provides more detail

about cash from operating activities.• The investing and financing sections for the

two methods are identical.

© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin

13-29

Direct Method Operating Activities

Remember that when we prepared the operating section using the indirect method, we also arrived at net cash inflow

of $2,922.

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13-30

Chester, ol’ Chester, ol’ buddy, I buddy, I

wonder if you wonder if you could help me could help me

with a little with a little cash flow cash flow

problem I’m problem I’m having?having?

End of Chapter 13