1. Chapter 13 Statement of Cash Flows

2. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-2 Business Background Positive cash flows permit a company to... Expand its operations. Replace needed assets. Take advantage of market opportunities. Pay dividends to owners. Wall Street analysts consider cash flow an important indicator of a company’s financial health.

3. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-3 Cash Currency 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

4. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-4 Classifications on the Statement of Cash Flows The SCF must include the following three sections, as defined in FASB Statement 95:  Operating Activities  Investing Activities  Financing Activities The SCF must include the following three sections, as defined in FASB Statement 95:  Operating Activities  Investing Activities  Financing Activities

5. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-5 Boston Beer uses the indirect method. The indirect method is used by 98.3% of companies. Statement continued...

6. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-6 This ending cash balance should agree with the balance sheet.

7. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-7 Cash Flows from Operating Activities Cash inflows and outflows that directly relate to income from normal operations reported on the income statement.

8. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 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 + _

9. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-9 Cash Flows from Operating Activities - Indirect Method Net Income Cash Flows from Operating Activities - Indirect Method Changes in current assets and current liabilities. + Losses and - Gains + Noncash expenses such as depreciation and amortization. The indirect method adjusts net income by eliminating noncash items.

10. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-10 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.

11. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-11 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.

12. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-12 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.

13. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-13 Relationships to the Balance Sheet and the Income Statement  Cash =  Liabilities  Stockholders’ Equity  Noncash Assets Derives from... Assets = Liabilities  Stockholders’ Equity

14. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-14 Use this table when adjusting Net Income to Operating Cash Flows using the indirect method. Relationships to the Balance Sheet and the Income Statement

15. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-15 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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18. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-18 The Statement of Cash Flows will begin with Boston Beer’s Net income from the Income Statement.

19. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-19 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.

20. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-20 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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22. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-22 Statement continued...

23. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 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).

24. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-24 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.

25. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-25 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.

26. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-26 Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.

27. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-27 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.

28. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-28 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.

29. © 2004 The McGraw-Hill Companies McGraw-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.

30. © 2004 The McGraw-Hill Companies McGraw-Hill/Irwin 13-30 Chester, ol’ buddy, I wonder if you could help me with a little cash flow problem I’m having? End of Chapter 13