Statement of Cash FlowsStatement of Cash Flows

Chapter 13

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2

Classifications of the Statement of Cash Flows

Operating Activities

Cash inflows and outflows directly related to earnings

from normal operations.

Investing Activities

Cash inflows and outflows related to the acquisition or sale of productive

facilities and investments in the securities of other companies.

Financing Activities

Cash inflows and outflows related to external sources of financing (owners and creditors) for the

enterprise.

Investing ActivitiesOperating Activities Financing ActivitiesSale of operational assets

Sale of investmentsCollections of loans

Cash received from revenues

Issuance of stockIssuance of bonds

and notes

CASH INFLOWS

Business

CASH OUTFLOWS

Purchase of operational assets

Purchase of investmentsLoans to others

Cash paid for expenses

Payment of dividendsRepurchase of stockRepayment of debt

McGraw-Hill/Irwin Slide 4

Cash Flows from Operating Activities

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

_

McGraw-Hill/Irwin Slide 5

Direct Method vs. Indirect MethodTwo Formats for Reporting Operating Activities

Reports the cash effects of each operating

activity

Direct Method

Starts with accrual net income and converts to cash basis

Indirect Method

Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.

McGraw-Hill/Irwin Slide 6

Cash Flows from

Investing Activities

+

Cash Flows from Investing Activities

Inflows Cash received from:Sale or disposal of property,

plant and equipmentSale or maturity of investments

in securities

_

Outflows Cash paid for: Purchase of property, plant and

equipment Purchase of investments in

securities

McGraw-Hill/Irwin Slide 7

Cash Flows from

Financing Activities

+

_

Cash Flows from Financing ActivitiesInflows

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

(in thousands) Three months ended(unaudited) March 31, 2007Cash flows from operating activities: Net income 5,768$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,726 Changes in assets and liabilities: Accounts receivable (1,967)

Inventory (1,917)Prepaid expense (1,677)Accounts payable (3,320)Accrued expenses (744)

Net cash provided by operating activities (2,131)Cash flows for investing activities: Purchases of property, plant and equipment (1,736)

2 Purchase of short-term investments (802) Net cash provided by investing activities (2,536) Cash flows from financing activities: Purchase of treasury stock (2,729) Proceeds from issuance of stock 5,698 Net cash used in financing activities 2,969 Net increase (decrease) in cash & cash equivalents (1,698) Cash & cash equivalents at beginning of period 63,147 Cash & cash equivalents at end of period 61,449$

CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.

Proceeds from disposal of property, plant & equipment

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.

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.

McGraw-Hill/Irwin Slide 10

Reporting 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.

McGraw-Hill/Irwin Slide 11

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..

Reporting Cash Flows from Operating Activities—Indirect Method

McGraw-Hill/Irwin Slide 12

Adjustment for Gains and Losses

GainsGains must be subtracted from net

income to avoid double counting the gain.

Losses Losses must be added to net income to avoid double counting the loss.

Transactions that cause gains and losses should be classified on the cash flow statement as operating, investing, or financing activities, depending on their dominate characteristics. For example, if the sale of

equipment produced a gain, it would be classified as an investing activity.

McGraw-Hill/Irwin Slide 13

Interpreting Cash Flows from Financing Activities

The long-term growth of a company is normally financed from three sources: internally

generated funds, the issuance of stock, and money borrowed on a long-term basis.

The statement of cash flows shows how management has elected to fund its growth. This

information is used by analysts who wish to evaluate the capital structure and growth

potential of a business.

McGraw-Hill/Irwin Slide 14

Required Supplemental Information

1. Reconciliation of net income to cash flow from operations.

2. Cash paid for income taxes and interest.

3. Significant noncash investing and financing activities.

Additional Cash Flow Disclosures

Significant noncash investing and financing transactions do not involve cash. Example: Purchase of a building with a mortgage.