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

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Classifications of the Statement of Cash Flows Operating Activities Investing Activities Financing ActivitiesCash inflows and outflows directly related to earnings from normal operations.Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.

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CASH INFLOWSOperating 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

BusinessCash paid for expenses Purchase of operational assets Purchase of investments Loans to others Payment of dividends Repurchase of stock Repayment of debt

CASH OUTFLOWS

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Cash Flows from Operating ActivitiesInflows Inflows Cash received from: Cash received from:investments investments

Customers Customers Dividends and interest on Dividends and interest on

+

Outflows Outflows Cash paid for: Cash paid for:

Purchase of goods for resale Purchase of goods for resale

and services (electricity, etc.) and services (electricity, etc.) Salaries and wages Salaries and wages Income taxes Income taxes Interest on liabilities Interest on liabilities

_

Cash Cash Flows Flows from from Operating Operating Activities Activities

13-8

Direct Method vs. Indirect MethodTwo Formats for Reporting Operating ActivitiesDirect 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.

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 Boston Beer uses Beer uses the indirect the indirect method. method. The indirect The indirect method is method is used by used by 98.3% of 98.3% of companies. companies.

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This ending cash This ending cash balance should balance should agree with the agree with the balance sheet. balance sheet.

13-16

Reporting Cash Flows from Operating ActivitiesIndirect MethodThe indirect method adjusts net income by eliminating The indirect method adjusts net income by eliminating noncash items. noncash items.+/- Changes in current +/- Changes in current assets and current assets and current liabilities. liabilities.

Net Net Income Income+ Losses and + Losses and --Gains Gains + Noncash + Noncash expenses such as expenses such as depreciation and depreciation and amortization. amortization.

Cash Flows Cash Flows from Operating from Operating Activities -Activities Indirect Method Indirect Method

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Reporting Cash Flows from Operating ActivitiesIndirect MethodChange in Account Balance During Year Increase Decrease Subtract from net Add to net income. income. Add to net income. Subtract from net income.

Current Assets Current Liabilities

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

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Reporting Cash Flows from Operating ActivitiesIndirect MethodUse the following Use the following financial statements for financial statements for The Boston Beer The Boston Beer Company and prepare Company and prepare the Statement of Cash the Statement of Cash Flows for the quarter Flows for the quarter ended on March 27, ended on March 27, 2004. 2004.

(Unaudited) In Thousands

THE BOSTON BEER COMPANY, INC. CONSOLIDATED BALANCE SHEET March 27, Dec. 27, 2004 2003

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Changes

ASSETS Curre nt a ssets: Cash & ca sh e quiva le nts Short-term inve stme nts Accounts Rece ivable Inve ntorie s Pre pa id e x pe nse s Tota l curre nt a ssets Equipm e nt, net Tota l a sse ts LIABILITIES & STOCKHOLDERS' EQUITY Curre nt lia bilitie s: Accounts pa ya ble Accrue d e x pe nses Tota l curre nt lia bilitie s Stockholde rs' Equity: Contribute d ca pital Reta ined e a rnings Tota l stockholde rs' e quity Tota l liabs & stockholde rs' equity

$ 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 (170)

$

6,343 $ 6,395 14,550 15,504 20,893 21,899 22,923 36,575 59,498 81,397

(52) (954)

24,107 37,846 61,953 $ 82,846 $

1,184 1,271

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

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The Statement of Cash Flows will begin The Statement of Cash Flows will begin with Boston Beers Net income from the with Boston Beers Net income from the Income Statement. Income Statement.

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

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Step 1 Step 1 Adjust net income for Adjust net income for depreciation and amortization depreciation and amortization expense. expense.

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

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Step 2 Step 2 Adjust net income for changes Adjust net income for changes in current assets and current in current assets and current liabilities. liabilities.

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

The Indirect Approach : (Operating Activities Section)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 Adjus tments to reconcile net income to net cash provided by operating activities: Depreciation 2,543 Changes in as sets and liabilities: Accounts receivable decrease 861 Inventory increase (577) Prepaid expens increase e (322) Accounts payable decrease (52) Accrued expens decreas es e (954) Net cash provided by operating activities $ 2,770Cha nge i n Account Bal a nce During Ye ar Incre a se De cre a se Subtra ct from ne t Add to ne t income . income. Add to ne t i ncome . Subtract from net i ncome .13-23

Curre nt Asse ts Curre nt Li abil itie s

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.

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Cash Flows from Investing ActivitiesInflows Inflows Cash received from: Cash received from:

Sale or disposal of property, Sale or disposal of property,

plant and equipment plant and equipment Sale or maturity of investments Sale or maturity of investments in securities in securities

+

Outflows Outflows Cash paid for: Cash paid for:

Purchase of property, plant and Purchase of property, plant and

_

Cash Cash Flows Flows from from Investing Investing Activities Activities

equipment equipment Purchase of investments in Purchase of investments in securities securities

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Cash Flows from Financing ActivitiesInflows Inflows Cash received from: Cash received from: +

Borrowings on notes, Borrowings on notes,

mortgages, bonds, etc. from mortgages, bonds, etc. from creditors creditors Issuing stock to owners Issuing stock to owners

Outflows Outflows Cash paid for: Cash paid for:

Repayment of principal to Repayment of principal to

creditors (excluding interest, creditors (excluding interest, which is an operating activity) which is an operating activity) Repurchasing stock from Repurchasing stock from owners owners Dividends to owners Dividends to owners

_

Cash Cash Flows Flows from from Financing Financing Activities Activities

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

Free Cash Flow13-37

Free Cash FlowCash Flow from Operating Activities Dividends Capital Expenditures In general, this measures a firms ability to pursue long-term investment opportunities.

Quality of Income ratio13-30

Quality of Income RatioQuality of = Income Ratio Cash Flow from Operating Activities 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 Ratio13-36

Capital Acquisition RatioCapital 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.

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