chapter 13 · the boston beer company, inc. consolidated statement of income in the case of boston...

© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill

Chapter 13

Statement of Cash Flows


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.


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


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:""OperatingOperating Activities##InvestingInvesting Activities$$FinancingFinancing Activities


(Unaudited)

In thousands for quarter endedMarch 28,

1998Cash flows from operating activities: Net income $2,076 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,225 Stock option compensation expense 59 Loss on write-down of equity securities 2,317 Changes in assets and liabilities: Accounts receivable (net) (3,655)

Inventory 1,020Prepaid expenses 2,699Other current assets (38)Other assets (long-term receivables) 79Accounts payable (1,631)Accrued expenses (2,857)

Net cash provided by (used in) operating activities 1,294

CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.

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 . . .


(Unaudited)


1998

Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)Net cash used in investing activities (2,636)Cash flows from financing activities: Proceeds from sale of shares 107 Net borrowing under line of credit 1,517Net cash provided by financing activities 1,624Net increase (decrease) in cash & cash equivalents 282Cash & cash equivalents at beginning of period 13Cash & cash equivalents at end of period $295

Supplemental disclosure of cash flow information:Interest paid 193Income taxes paid 47


This ending cash

balance should

agree with the balance

sheet.

This ending cash

balance should

agree with the balance

sheet.


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.


Outflows to:! Purchase goods to resell

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

Outflows to:! Purchase goods to resell

and services.! Salaries & 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

+

_


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

+ Noncashexpenses such as depreciation and

amortization.

+ Noncashexpenses 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.


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.


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 equity securities to owners.

Inflows from:! Borrowing on notes,

mortgages, bonds, etc. from creditors.

! Issuing equity securities to owners.

Outflows to:! Repay principal to creditors

(excluding interest).! Repurchase equity securities

from owners.! Pay dividends to owners.

Outflows to:! Repay principal to creditors

(excluding interest).! Repurchase equity securities

from owners.! Pay dividends to owners.


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 different types of transactions

and events.

Information needed to prepare a statement of cash flows:

!! Comparative Balance Sheets.Comparative Balance Sheets.!! Income Statement.Income Statement.

!! Additional details concerning Additional details concerning different types of transactions different types of transactions

and events.and events.



∆∆∆∆ Cash = ∆ ∆ ∆ ∆ Liabilities + ∆ + ∆ + ∆ + ∆ Stockholders’ Equity − ∆ − ∆ − ∆ − ∆ Noncash Assets

∆∆∆∆ Cash = ∆ ∆ ∆ ∆ Liabilities + ∆ + ∆ + ∆ + ∆ Stockholders’ Equity − ∆ − ∆ − ∆ − ∆ Noncash Assets

Derives from . . .

Assets = Liabilities + + + + Stockholders’ EquityAssets = Liabilities + + + + Stockholders’ Equity


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..

Change in Account Balance During YearIncrease Decrease

Current Subtract from net Add to net income.Assets income.Current Add to net income. Subtract from net

Liabilities income.



Using The Boston Beer Company,

let’s examine the preparation of the Statement of Cash

Flows for the quarter ended on March 28, 1998.

Using The Boston Beer Company,

let’s examine the preparation of the Statement of Cash

Flows for the quarter ended on March 28, 1998.

Statement of Cash Flows Indirect Method Example


(Unaudited)

In Thousands Except Per Share AmountsQuarter ended March 28, 1998

Sales $51,660Less excise taxes 6,412 Net Sales 45,248Cost of sales 21,428 Gross profit 23,820Operating expenses:Advertising, promotional, & selling expenses 13,540General and administrative expenses 3,224 Total operating expenses 16,764Operating income 7,056 Other income (expense):Interest income 466Interest expense (170)Other income (expense), net (2,556) Total other income (2,260)Income before income taxes 4,796Provision for income taxes 2,720Net income $2,076

THE BOSTON BEER COMPANY, INC.CONSOLIDATED STATEMENT OF INCOME

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.


(Unaudited)

In Thousands Except Per Share AmountsQuarter ended March 28, 1998

Sales $51,660Less excise taxes 6,412 Net Sales 45,248Cost of sales 21,428 Gross profit 23,820Operating expenses:Advertising, promotional, & selling expenses 13,540General and administrative expenses 3,224 Total operating expenses 16,764Operating income 7,056 Other income (expense):Interest income 466Interest expense (170)Other income (expense), net (2,556) Total other income (2,260)Income before income taxes 4,796Provision for income taxes 2,720Net income $2,076

THE BOSTON BEER COMPANY, INC.CONSOLIDATED STATEMENT OF INCOME

In the case of Boston Beer, those adjustments included depreciation & amortization expense ($1,225) and for

compensation expense in the form of stock options ($59). In addition, there was a $2,317 loss that was related to a

write-down of an investment.

Since those numbers are not obvious in the Income Statement, they must be derived from other sources, such as the Notes to the Financial Statements, or the General

Ledger Trial Balance.

In the case of Boston Beer, those adjustments included depreciation & amortization expense ($1,225) and for

compensation expense in the form of stock options ($59). In addition, there was a $2,317 loss that was related to a

write-down of an investment.

Since those numbers are not obvious in the Income Statement, they must be derived from other sources, such as the Notes to the Financial Statements, or the General

Ledger Trial Balance.

The Net income

number will be adjusted for

non-cash items.

The Net income

number will be adjusted for

non-cash items.


(Unaudited)


1998Cash flows from operating activities: Net income $2,076

Net cash provided by (used in) operating activities


With the indirect method, always start with the net income

or net loss for the period.

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

With the indirect method, always start with the net income

or net loss for the period.

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


(Unaudited)


1998Cash flows from operating activities: Net income $2,076 Adj. to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,225 Stock option compensation expense 59 Loss on write-down of equity securities 2,317



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

sheet 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 a comparative balance

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

the end of the period.

Comparative Balance Sheets . . .


(Unaudited) March 28, Dec. 27,In Thousands 1998 1997 ChangesASSETSCurrent assets:

Cash & cash equivalents 295$ 13$ 282 Short-term investments 36,132 38,011 (1,879) Accounts Receivable 20,138 16,483 3,655 Inventories 12,655 13,675 (1,020) Prepaid expenses 1,645 4,344 (2,699) Deferred income taxes 2,266 2,266 - Other current assets 1,636 1,598 38

Total current assets 74,767 76,390 Equipment, net 29,754 28,781 973 Other assets (long-term rec.) 2,663 2,742 (79) Total assets 107,184$ 107,913$

THE BOSTON BEER COMPANY, INC.CONSOLIDATED BALANCE SHEET


(Unaudited) March 28, Dec. 27,In Thousands 1998 1997 ChangesLIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:

Accounts Payable 7,925$ 9,556$ (1,631) Bank line of credit 1,517 - 1,517 Accrued expenses 10,913 13,770 (2,857)

Total current liabilities 20,355 23,326 LT debt, less current maturities 10,000 10,000 - Long-term deferred taxes 789 789 - Stockholders' Equity:

Class A Com Stk, $.01 par 164 163 1 Class B Com Stk, $.01 par 41 41 - Additional paid-in capital 56,188 56,023 165 Retained earnings 19,647 17,571 2,076

Total stockholders' equity 76,040 73,798 Total liabs & stockholders' equity 107,184 107,913

THE BOSTON BEER COMPANY, INC.CONSOLIDATED BALANCE SHEET


(Unaudited)


1998Cash flows from operating activities: Net income $2,076 Adj. to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,225 Stock option compensation expense 59 Loss on write-down of equity securities 2,317




Current Subtract from net Add to net income.Assets income.

Current Add to net income. Subtract from netLiabilities income.

Now, make adjustments for changes in current assets and current liabilities using the decision table below.

Now, make adjustments for changes in current assets and current liabilities using the decision table below.


(Unaudited)


1998Cash flows from operating activities: Net income $2,076 Adj. to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,225 Stock option compensation expense 59 Loss on write-down of equity securities 2,317 Changes in assets and liabilities: Accounts receivable (net) (3,655)






Subtract the $3,655 increase in Accounts Receivable.Subtract the $3,655 increase in Accounts Receivable.


(Unaudited)



Inventory 1,020






Add the $1,020 decrease in Inventory.Add the $1,020 decrease in Inventory.


(Unaudited)



Inventory 1,020Prepaid expenses 2,699






Add the $2,699 decrease in Prepaid Expenses.Add the $2,699 decrease in Prepaid Expenses.


(Unaudited)



Inventory 1,020Prepaid expenses 2,699Other current assets (38)






Subtract the $38 increase in Other Current Assets.Subtract the $38 increase in Other Current Assets.


(Unaudited)



Inventory 1,020Prepaid expenses 2,699Other current assets (38)Other assets (long-term receivables) 79






Add the $79 decrease in the current portion of Other Assets.

Add the $79 decrease in the current portion of Other Assets.


(Unaudited)









Subtract the $1,631 decrease in the Accounts Payable and the $2,857 decrease in Accrued Expenses.

Subtract the $1,631 decrease in the Accounts Payable and the $2,857 decrease in Accrued Expenses.


(Unaudited)






Statement continued . . .


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198)


The balance sheet indicates that Equipment increased by $973 during the quarter.

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

company purchased $2,198 of new equipment. This is offset by $1,225 in

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

The balance sheet indicates that Equipment increased by $973 during the quarter.

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

company purchased $2,198 of new equipment. This is offset by $1,225 in

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


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)


Short-term investments decreased by a net $1,879 during the quarter.

$2,317 of the change was included in the Cash Flows from Operating Activities as a

write-down of the investment. The remaining $438 is the amount of the new investments

purchased during the quarter.

Short-term investments decreased by a net $1,879 during the quarter.

$2,317 of the change was included in the Cash Flows from Operating Activities as a

write-down of the investment. The remaining $438 is the amount of the new investments

purchased during the quarter.


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)Net cash used in investing activities (2,636)Cash flows from financing activities: Proceeds from sale of shares 107


Class A Common Stock and Additional Paid-in Capital increased by a net $166. $59 of that amount was

noncash compensation expense. The remaining $107 represents proceeds from sale of new shares.

Class A Common Stock and Additional Paid-in Capital increased by a net $166. $59 of that amount was

noncash compensation expense. The remaining $107 represents proceeds from sale of new shares.


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)Net cash used in investing activities (2,636)Cash flows from financing activities: Proceeds from sale of shares 107 Net borrowing under line of credit 1,517


$1,517 was borrowed against a line of credit during the period.

$1,517 was borrowed against a line of credit during the period.


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)Net cash used in investing activities (2,636)Cash flows from financing activities: Proceeds from sale of shares 107 Net borrowing under line of credit 1,517Net cash provided by financing activities 1,624Net increase (decrease) in cash & cash equivalents 282Cash & cash equivalents at beginning of period 13Cash & cash equivalents at end of period $295


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.


(Unaudited)


1998Net cash provided by (used in) operating activities 1,294Cash flows for investing activities: Purchases of fixed assets (2,198) Purchases of short-term investments (438)Net cash used in investing activities (2,636)Cash flows from financing activities: Proceeds from sale of shares 107 Net borrowing under line of credit 1,517Net cash provided by financing activities 1,624Net increase (decrease) in cash & cash equivalents 282Cash & cash equivalents at beginning of period 13Cash & cash equivalents at end of period $295

Supplemental disclosure of cash flow information:Interest paid 193Income taxes paid 47


Specific Supplemental Information must be provided when the indirect method is used.

Specific Supplemental Information must be provided when the indirect method is used.


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

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

two methods are identical.


Chester,Chester, ol’ol’buddybuddy, I wonder if , I wonder if

you could help you could help me with a little me with a little

cash flow cash flow problem I’m problem I’m

having?having?

End of Chapter 13

chapter 13 · the boston beer company, inc. consolidated statement of income in the case of boston...

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