libby ch 13
TRANSCRIPT
Chapter 13 Statement of Cash FlowsChapter 13 Statement of Cash Flowsread pp. 658-662, 665-666,677-680read 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
13-5
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.
13-6
Investing ActivitiesOperating Activities Financing ActivitiesSale of operational assets
Sale of investments
Collections of loans
Cash received from revenues
Issuance of stock
Issuance of bonds and notes
CASH INFLOWS
Business
CASH OUTFLOWS
Purchase of operational assets
Purchase of investmentsLoans to others
Cash paid for expenses
Payment of dividends
Repurchase of stock
Repayment of debt
13-7
Cash Flows from Operating Activities
Cash Flows from
Operating Activities
Cash Flows from
Operating Activities
InflowsCash received from: Customers Dividends and interest on
investments
InflowsCash received from: Customers Dividends and interest on
investments
+
OutflowsCash paid for: Purchase of goods for resale
and services (electricity, etc.) Salaries and wages Income taxes Interest on liabilities
OutflowsCash paid for: Purchase of goods for resale
and services (electricity, etc.) Salaries and wages Income taxes Interest on liabilities
_
13-8
Direct Method vs. Indirect Method
Two 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 netcash flows from operating activities is generated.
13-11
(in thousands) Three months ended(unaudited) March 27, 2004Cash 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 2,770Cash 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$
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.
This ending cash balance should agree with the balance sheet.
This ending cash balance should agree with the balance sheet.
13-16
Reporting 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.
13-17
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 Year
Increase Decrease
Current Subtract from net Add to net income.Assets income.
Current Add to net income. Subtract from netLiabilities income.
Reporting Cash Flows from Operating Activities—Indirect Method
13-18
Reporting Cash Flows from Operating Activities—Indirect Method
Use the following financial statements for
The Boston Beer Company and prepare the Statement of Cash Flows for the quarter ended on March 27,
2004.
Use the following financial statements for
The Boston Beer Company and prepare the Statement of Cash Flows for the quarter ended on March 27,
2004.
13-19
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 ChangesASSETSCurrent assets:
Cash & cash equivalents 24,746$ 27,792$ (3,046) Short-term investments 19,725 15,098 4,627 Accounts Receivable 9,571 10,432 (861)
Inventories 10,467 9,890 577 Prepaid expenses 1,448 1,126 322
Total current assets 65,957 64,338 Equipment, net 16,889 17,059 (170)
Total assets 82,846$ 81,397$
LIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:
Accounts payable 6,343$ 6,395$ (52)Accrued expenses 14,550 15,504 (954)
Total current liabilities 20,893 21,899 Stockholders' Equity:
Contributed capital 24,107 22,923 1,184Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity 82,846$ 81,397$
THE BOSTON BEER COMPANY, INC.CONSOLIDATED BALANCE SHEET
13-20
(Unaudited) Three months endedIn Thousands March 27, 2004 Net sales 44,655$
Cost of sales 18,073 Gross profit 26,582Operating expenses:Selling, general and administrative 22,188
Depreciation and amortization 2,543 Total operating expenses 24,731Operating income 1,851
Interest income 192Income before provision for income taxes 2,043Provision for income taxes 772Net income $1,271
THE BOSTON BEER COMPANY, INC.CONSOLIDATED STATEMENT OF INCOME
The Statement of Cash Flows will begin with Boston Beer’s Net income from the
Income Statement.
The Statement of Cash Flows will begin with Boston Beer’s Net income from the
Income Statement.
13-21
(Unaudited) Three months endedIn thousands March 27, 2004Cash flows from operating activities: Net income 1,271$ 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$
CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.
Step 1Adjust net income for
depreciation and amortization expense.
Step 1Adjust net income for
depreciation and amortization expense.
13-22
(Unaudited) Three months endedIn thousands March 27, 2004Cash 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$
CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.
(Remember, we showed the comparative balance sheets a few slides earlier.)
Step 2Adjust net income for changes in current assets and current
liabilities.
Step 2Adjust net income for changes in current assets and current
liabilities.
The Indirect Approach :The Indirect Approach :(Operating Activities Section)(Operating Activities Section)
13-23
(Unaudited) Three months endedIn thousands March 27, 2004Cash 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$
CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.
Change in Account Balance During Year
Increase Decrease
Current Subtract from net Add to net income.Assets income.
Current Add to net income. Subtract from netLiabilities income.
The Direct Approach The Direct Approach ( operating activities section)( operating activities section)
13-27
(Unaudited) Three months endedIn thousands March 27, 2004Cash flows from operating activities:
Cash collected from customers 45,516$ Cash collected from interest 192 Cash payments to suppliers (18,702)
Cash payments for expenses (23,464) Cash payments for income taxes (772)Net cash provided by operating activities 2,770$
CONSOLIDATED STATEMENT OF CASH FLOW S
THE BOSTON BEER COMPANY, INC.
Remember that when we prepared the operating section using the indirect method, we also arrived at net cash inflow of $2,770.
13-9
Cash Flows from
Investing Activities
Cash Flows from
Investing Activities
+
Cash Flows from Investing Activities
InflowsCash received from: Sale or disposal of property,
plant and equipment Sale or maturity of investments
in securities
InflowsCash received from: Sale or disposal of property,
plant and equipment Sale or maturity of investments
in securities
_Outflows
Cash paid for: Purchase of property, plant and
equipment Purchase of investments in
securities
OutflowsCash paid for: Purchase of property, plant and
equipment Purchase of investments in
securities
13-10
Cash Flows from
Financing Activities
Cash Flows from
Financing Activities
+
_
Cash Flows from Financing Activities
InflowsCash received from: Borrowings on notes,
mortgages, bonds, etc. from creditors
Issuing stock to owners
InflowsCash received from: Borrowings on notes,
mortgages, bonds, etc. from creditors
Issuing stock to owners
OutflowsCash paid for: Repayment of principal to
creditors (excluding interest, which is an operating activity)
Repurchasing stock from owners
Dividends to owners
OutflowsCash paid for: Repayment of principal to
creditors (excluding interest, which is an operating activity)
Repurchasing stock from owners
Dividends to owners
Additional DisclosuresAdditional Disclosures( #1 below is required if using the “direct method”, # 2 & #3 ( #1 below is required if using the “direct method”, # 2 & #3
apply to both direct & indirect methods )apply to both direct & indirect methods )
13-43
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.
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.
Free Cash FlowFree Cash Flow13-37
In general, this measures a firm’s ability to pursue long-term investment
opportunities.
Free Cash Flow
Cash Flow from Operating Activities Cash Flow from Operating Activities –– Dividends Dividends ––Capital ExpendituresCapital Expenditures
Quality of Income ratioQuality of Income ratio13-30
Quality of Income Ratio
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.
Cash Flow from Operating ActivitiesNet Income
Quality of Income Ratio
=
Capital Acquisition RatioCapital Acquisition Ratio13-36
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.
Capital Acquisition Ratio
Cash Flow from Operating ActivitiesCash Paid for Property, Plant,
and Equipment
Capital Acquisition
Ratio=
End of Chapter MC AnswersEnd of Chapter MC Answers
1. b) 2. d) 3. d) 4. a) 5. a) 6. b) 7. d) 8. a) 9. d) 10. c)