Statement of Cash FlowsChapter 13McGraw-HillIrwin© .docx

Statement of Cash Flows
Chapter 13
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Chapter 13: Statement of Cash Flows
*
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Understanding the Business
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.
*
The cash flow statement focuses attention on a firm’s ability to
generate cash internally, its management of current assets and
current liabilities, and the details of its investments and its
external financing. Positive cash flows permit a company to
take advantage of market opportunities, pay dividends to
owners, expand its operations, and replace needed assets. Wall
Street analysts consider cash flow an important indicator of a

company’s financial health.
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CashShort-term, highly liquid investments.Readily convertible
into cash.So near maturity that market value is unaffected by
interest rate changes (i.e., less than 3 months to maturity).
Classifications of the Statement of Cash Flows
Currency
Cash Equivalents
*
Cash equivalents are short-term, highly liquid investments that
are both readily convertible to known amounts of cash and so
near maturity that there is little risk of change in their values if
interest rates change.
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Classifications of the Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Cash 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.

*
Part I
The statement of cash flows reports cash inflows and outflows
in three broad categories: operating activities, investing
activities, and financing activities.
Part II
The operating activities section reports the cash effects of the
elements of net income.
Part III
The investing activities section reports the cash effects of the
acquisition and disposition of assets (other than inventory and
cash equivalents).
Part IV
The financing activities section reports the cash effects of the
sale or repurchase of shares, the issuance or repayment of debt
securities, and the payment of cash dividends.
We will discuss each of these sections in more detail in the next
few slides.
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CASH INFLOWS
Business
CASH OUTFLOWS
Investing Activities
Operating Activities
Financing Activities

Sale of operational assets
Sale of investments
Collections of loans
Cash received from revenues
Issuance of stock
Issuance of bonds and notes
Purchase of operational assets
Purchase of investments
Loans to others
Cash paid for expenses
Payment of dividends
Repurchase of stock
Repayment of debt
*
Many decisions benefit from information about the company’s
underlying cash flow process. Cash continually flows into and
out of an active business. This graphic illustrates several
examples of cash inflows and outflows classified as operating,
investing and financing activities. Take a few minutes to review
these examples before we take a closer look at each section.
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Cash Flows from Operating Activities
Cash Flows from Operating Activities
Inflows
Cash received from:CustomersDividends and interest on
investments
+

_
Outflows
Cash paid for:Purchase of goods for resale and services
(electricity, etc.)Salaries and wagesIncome taxesInterest on
liabilities
*
Cash flows from operating activities are cash inflows and
outflows directly related to earnings from normal operations.
Cash inflows include cash received from customers and
dividends and interest on investments in other companies. Cash
outflows include cash paid for purchases of goods for resale and
services, salaries and wages, income taxes and interest on
liabilities. The cash flows in this section are illustrated in the
examples in this slide.
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Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Note that no matter which format is used, the same amount of
net cash flows from operating activities is generated.
Reports the cash effects of each operating activity
Direct Method
Starts with accrual net income and converts to cash basis
Indirect Method
*

There are two acceptable formats for presenting the cash flows
from operating activities. The direct method reports
components of cash flows from operating activities as gross
receipts and gross payments. The indirect method adjusts net
income to compute cash flows from operating activities. Note
that no matter which format is used, the same amount of net
cash flows from operating activities is generated.
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Cash Flows from Investing Activities
Cash Flows from Investing Activities
Inflows
Cash 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
equipmentPurchase of investments in securities
*
Cash flows from investing activities are cash inflows and
outflows related to the acquisition or sale of productive
facilities and investments in the securities of other companies.
Included in this classification are cash payments to acquire
property, plant and equipment, and investment in securities of
other companies. When these assets later are sold, any cash
receipts from their disposition also are classified as investing
activities. The cash flows in this section are illustrated in the

examples in this slide.
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Cash Flows from Financing Activities
+
Cash Flows from Financing Activities
Inflows
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
ownersDividends to owners
_
*
Cash flows from financing activities are cash inflows and
outflows related to external sources of financing (owners and
creditors) for the enterprise. Included in this classification are
cash inflows from borrowings on notes, mortgages, bonds and
other debts from creditors and from proceeds from the issuance
of stock. Subsequent transactions related to these financing
transactions, such as a buyback of stock, the repayment of debt,
and the payment of cash dividends to shareholders, also are
classified as financing activities. The cash flows in this section
are illustrated in the examples in this slide.
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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.
*
Here is the statement of cash flows for Boston Beer. As you
can see, since the operating activities section starts with net
income, Boston Beer uses the indirect method. The indirect
method is used by 98.3% of companies. In addition to the three
sections (Operating, Investing, and Financing), there is also a
cash reconciliation at the bottom of the statement. The ending
cash balance on the statement of cash flows should agree with
the cash balance on the balance sheet.
Sheet1THE BOSTON BEER COMPANY,
INC.CONSOLIDATED STATEMENT OF CASH FLOWS(in
thousands)Three months ended(unaudited)March 31, 2007Cash
flows from operating activities:Net income$ 5,768Adjustments
to reconcile net income to net cashprovided by operating
activities:Depreciation1,726Changes 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)Proceeds from disposal of
property,
plant & equipment2Purchase 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
stock5,698Net cash used in financing activities2,969Net
increase (decrease) in cash & cash equivalents(1,698)Cash &
cash equivalents at beginning of period63,147Cash & cash

equivalents at end of period$ 61,449
Sheet2Selected Cash Transactions and Their Effect on Other
Balance Sheet AccountsCategoryTransactionsCash EffectOther
Account AffectedOperatingCollect accounts receivable+Cash-
Accounts Receivable (A)Pay accounts payable-Cash-Accounts
Payable (L)Prepay rent-Cash+Prepaid Rent (A)Pay interest-
Cash-Retained Earnings (SE)Sale for cash+Cash+Retained
Earnings (SE)InvestingPurchase equipment for cash-
Cash+Equipment (A)Sell investment securities for cash+Cash-
Investments (A)FinancingPay back debt to bank-Cash-Notes
Payable-Bank (L)Issue stock for cash+Cash+Common Stock and
Paid-in-Capital (SE)
INC.CONSOLIDATED BALANCE SHEET(Unaudited)March
27,Dec. 27,In Thousands20042003ChangesASSETSCurrent
assets:Cash & cash equivalents$ 24,746$ 27,792(3,046)Short-
term investments19,72515,0984,627Accounts
Receivable9,57110,432(861)Inventories10,4679,890577Prepaid
expenses1,4481,126322Total current
assets65,95764,338Equipment, net16,88917,059(170)Total
assets$ 82,846$ 81,397LIABILITIES & STOCKHOLDERS'
EQUITYCurrent liabilities:Accounts payable$ 6,343$
6,395(52)Accrued expenses14,55015,504(954)Total current
liabilities20,89321,899Stockholders' Equity:Contributed
capital24,10722,9231,184Retained
earnings37,84636,5751,271Total stockholders'
equity61,95359,498Total liabs & stockholders' equity$
82,846$ 81,397
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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.
*
Preparing and interpreting the cash flow statement requires an
analysis of balance sheet and income statement accounts that
relate to the three sections of the cash flow statement.
Preparers must analyze the numbers recorded in the accounts
under the accrual method and adjust them to a cash basis. To
prepare a statement of cash flows, preparers need comparative
balance sheets, a complete income statement, and additional
details concerning selected accounts where the total change
amount in an account balance during the year does not reveal
the underlying nature of the cash flows.
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Derives from . . .
*
The change in cash equals the change in liabilities plus the
change in stockholders’ equity minus the change in noncash
assets. Thus any transaction that changes cash must be
accompanied by a change in liabilities, stockholders’ equity, or
noncash assets. The next slide provides more detail on this
concept.
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*
This exhibit illustrates the relationship for selected cash
transactions and other accounts that are affected. For example,
when a company collects cash on an accounts receivable, cash
increases and the noncash asset accounts receivable decreases.
Take a minute and review the relationships highlighted on this
slide.
flows from operating activities:Net income$1,271Adj. to
reconcile net income to net cashprovided by operating
liabilities:Accounts receivable861Inventory(577)Prepaid
expense(322)Accounts payable(52)Accrued expenses(954)Net
cash provided by operating activities2,770Cash flows for
investing activities:Purchases of property, plant and equipment-
2,373Purchase of short-term investments-4,627Net cash
provided by investing activities-7,000Cash flows from financing
activities:Purchase of treasury stock-4,409Proceeds from
issuance of stock5,593Net cash used in financing
activities1,184Net increase (decrease) in cash & cash
equivalents-3,046Cash & cash equivalents at beginning of
period27,792Cash & cash equivalents at end of period$24,746

Sheet3
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Reporting Cash Flows from Operating Activities—Indirect
Method
Net Income
Cash Flows from Operating Activities - Indirect Method
The indirect method adjusts net income by eliminating noncash
items.
+/- Changes in current assets and current liabilities.
+ Losses and - Gains
+ Noncash expenses such as depreciation and amortization.
*
Remember that the indirect method starts with net income and
converts it to cash flows from operating activities. This
involves adjusting net income for the differences in the timing
of accrual basis net income and cash flows, as shown by the
items in the yellow boxes on this slide. Let’s look more closely
at the changes in current assets and current liabilities on the
next slide.
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Use this table when adjusting Net Income to Operating Cash

Flows using the indirect method.
Method
*
This table summarizes how to adjust net income for changes in
current assets and current liabilities. If a current asset account
has increased, the increase would be subtracted from accrual
basis net income. Similarly, if a current asset account has
decreased, the decrease would be added to accrual basis net
income. For liabilities, increases are added to and decreases are
subtracted from accrual basis net income.
Sheet1Change in Account Balance During YearNet Cash Flows
from Operating ActivitiesIncreaseDecrease+Net Cash Flows
from Investing ActivitiesCurrentSubtract from netAdd to net
income.+Net Cash Flows from Financing
ActivitiesAssetsincome.=Net Cash Flows for the
PeriodCurrentAdd to net income.Subtract from net+Beginning
of Period Cash BalanceLiabilitiesincome.=End of Period Cash
Balance
&A
Page &P
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Adjustment for Gains and Losses
Gains
Gains 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.
*
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.
Gains must be subtracted from net income to avoid double
counting the gain.
Losses must be added to net income to avoid double counting
the loss.
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Method
Use the following financial statements for The Boston Beer
Company and prepare the Statement of Cash Flows for the
quarter ended on
March 31, 2007
*
We will use Boston Beer’s financial statements on the following
slides to help prepare the Statement of Cash Flows for the
quarter ended on March 31, 2007.

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*
Here is the comparative balance sheet for Boston Beer. The
account changes have already been calculated in the last column
for us.

term investments20,02519,223802Accounts
Receivable19,73717,7701,967Inventories18,95117,0341,917Pre
paid expenses4,3982,7211,677Total current
assets124,560119,895Equipment, net31,88731,8798Total
17,942(3,320)Accrued expenses22,18422,928(744)Total current
156,447$ 151,774
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The Statement of Cash Flows will begin with Boston Beer’s Net
income from the Income Statement.
*
Here is the income statement for Boston Beer. We will use the
indirect method so we will start our statement of cash flows
with the net income reported on this income statement.
INC.CONSOLIDATED STATEMENT OF
INCOME(Unaudited)Three months endedIn ThousandsMarch

30, 2007Net sales$ 72,448Cost of sales32,126Gross
profit40,322Operating expenses:Selling, general and
administrative30,078Depreciation and amortization1,726Total
operating expenses31,804Operating income8,518Interest
income1,132Income before provision for income
taxes9,650Provision for income taxes3,882Net income$5,768
Sheet2
Sheet3
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Step 1
Adjust net income for depreciation and amortization expense.
*
Step one is to adjust net income for depreciation and
amortization expense. We can find these amounts on the
income statement.
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(Remember, we showed the comparative balance sheets a few
slides earlier.)
Step 2
Adjust net income for changes in current assets and
current liabilities.
*
Step two is to adjust net income for changes in current assets

and current liabilities. The changes in these accounts were
calculated on the balance sheet a few slides earlier.
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*
We use this table to help remember whether to add or subtract
the change in the current asset and current liability accounts.
Sheet1Change in Account Balance During YearNet Cash Flows
from Operating ActivitiesIncreaseDecrease+Net Cash Flows
from Investing ActivitiesCurrentSubtract from netAdd to net
income.+Net Cash Flows from Financing
ActivitiesAssetsincome.=Net Cash Flows for the
PeriodCurrentAdd to net income.Subtract from net+Beginning
of Period Cash BalanceLiabilitiesincome.=End of Period Cash
Balance
&A
Page &P
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Interpreting Cash Flows from Operating Activities
Accounts Receivable Changes
Managers sometimes attempt to boost declining sales by
extending credit terms or by lowering credit standards. The
resulting increase in accounts receivable can cause net income
to outpace cash flows from operations.
Inventory Changes
Inventory growth can be a sign that planned sales growth did
not materialize. A decline in inventory can be a sign that the
company is anticipating lower sales in the next quarter.

*
The operating activities section of the cash flow statement
focuses attention on the firm’s ability to generate cash
internally through operations and its management of current
assets and current liabilities. Most analysts believe that this is
the most important section of the statement because, in the long
run, operations are the only source of cash. That is, investors
will not invest in a company and creditors will not lend to a
company if they do not believe that cash generated from
operations will be available to pay dividends or repay the loan.
As a result, cash flows in the operating section must be
carefully analyzed. Let’s take a closer look at the effects of
changes in receivables and inventory.
Managers sometimes attempt to boost declining sales by
extending credit terms or by lowering credit standards. The
resulting increase in accounts receivable can cause net income
to outpace cash flows from operations. As a consequence, many
analysts view this pattern as a warning sign.
Inventory growth can be a sign that planned sales growth did
not materialize. A decline in inventory can be a sign that the
company is anticipating lower sales in the next quarter.
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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 Activities
Net Income
Quality of Income Ratio
=
*
The quality of income ratio is computed as cash flow from
operating activities divided by 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.
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Let’s focus on the investing accounts.
*
Here is the balance sheet for Boston Beer that we looked at
earlier. Let’s focus on the investing accounts, which are short-
term investments and equipment.

156,447$ 151,774
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The balance sheet indicates that Equipment increased by $8
during the quarter.
If you had access to additional company information, you would
discover that the company purchased $1,736 of new equipment
and sold old equipment at its book value of $2. This is offset
by $1,726 in depreciation expense (see the Cash Flows from
Operating Activities).
*
The balance sheet indicates that Equipment increased by $8,000
during the quarter. However, if you had access to additional
company information, you would discover that the company
actually purchased $1,736,000 of new equipment and sold old
equipment for its book value of $2,000. This is offset by
$1,726,000 in depreciation expense (as noted in the Operating
Activities section). In the investing section, we need to show
the total amount spent on purchasing equipment.

property,
82,846$ 81,397

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Short-term investments increased by $802 during the quarter.
Although short-term investments is a current asset, it is reported
in the investing section on the statement of cash flows.
*
Short-term investments increased by $802,000 during the
quarter. Although short-term investments is a current asset, it is
reported in the investing section on the statement of cash flows.
property,

82,846$ 81,397
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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 Acquisitions Ratio
Cash Flow from Operating Activities
Cash Paid for Property, Plant,

and Equipment
Capital Acquisitions Ratio
=
*
The capital acquisition ratio is computed as cash flow from
operating activities divided by 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.
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In general, this measures a firm’s ability to pursue long-term
investment opportunities.
Free Cash Flow
Cash Flow from Operating Activities – Dividends – Capital
Expenditures
*
Free cash flow is computed as cash flow from operating
activities minus dividends minus capital expenditures.
In general, this measures a firm’s ability to pursue long-term
investment opportunities.

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Let’s focus on the financing account.
*
Here is the balance sheet for Boston Beer that we looked at
earlier. Now, let’s focus on the financing account, contributed
capital.

156,447$ 151,774
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The net increase in Contributed Capital of $2,969 was caused by
two transactions.
First, Boston Beer repurchased $2,729 of outstanding stock,
which is a cash outflow.
Second, the company issued common stock to employees for
$5,698, which is a cash inflow.
*
The net increase in Contributed Capital of $2,969,000 was
caused by two transactions.
First, Boston Beer repurchased $2,729,000 of outstanding stock,

which is a cash outflow.
Second, the company issued common stock to employees for
$5,698,000 which is a cash inflow.
property,

82,846$ 81,397
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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.
*
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.
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Required Supplemental Information Reconciliation of net
income to cash flow
from operations. Cash paid for income taxes and interest.
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.
*
If the company uses the direct method for computing cash flow
from operations, it must present the reconciliation of net income
to cash flow from operations.
If a company uses the indirect method for computing cash flow
from operations, it must disclose cash paid for income taxes and
interest. These disclosures are normally listed at the bottom of
the statement.
Certain transactions are important investing and financing
activities but have no cash flow effects. These are called
noncash investing and financing activities and supplemental
disclosure of these transaction is required, in either narrative or
schedule format. An example of a significant noncash investing

and financing activity is the purchase of a building with a
mortgage.
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Supplement A: Reporting Cash Flows from Operating
Activities—Direct Method
*
Supplement A: Reporting Cash Flows from Operating
Activities—Direct Method
The direct method presents a summary of all operating
transactions that result in either a debit or a credit to cash. It is
prepared by adjusting each item on the income statement from
an accrual basis to a cash basis. This slide summarizes the way
to adjust income statement items to a cash basis. For example,
when sales are recorded, accounts receivable increases, and
when cash is collected, accounts receivable decreases. Thus, to
convert sales revenue from the accrual basis to the cash basis
we would add a decrease in accounts receivable or subtract an
increase in accounts receivable. Take a minute and review the
other computations on this slide.

82,846$ 81,397
Sheet4Revenue or Expense ItemSales revenue+Decrease in
accounts receivable-Increase in accounts receivable=Cash

collected from customersInterest/Dividend revenue+Decrease in
interest/dividends receivable-Increase in interest/dividends
receivable=Collections of interest/dividends on investmentsCost
of goods sold+Increase in inventory-Decrease in inventory-
Increase in accounts payable+Decrease in accounts
payable=Cash payments to suppliersOther expenses+Increase in
prepaid expenses-Decrease in prepaid expenses-Increase in
accrued expenses+Decrease in accrued expenses=Cash paid for
expensesIncome tax expense+Increase in prepaid income taxes-
Decrease in prepaid income taxes-Increase in income taxes
payable+Decrease in income taxes payable=Payments of income
taxes

82,846$ 81,397
taxes

82,846$ 81,397

taxes

82,846$ 81,397
taxes
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Remember that when we prepared the operating section using
the indirect method, we also arrived at net cash inflow of
$2,131.
*
This is the operating activities section of the statement of cash
flows prepared using the direct method. Notice that the net
cash provided by operating activities of $2,131 is the same as
that derived using the indirect method.
INC.CONSOLIDATED STATEMENT OF CASH
FLOWS(Unaudited)Three months endedIn thousandsMarch 31,
2007Cash flows from operating activities:Cash collected from
customers$ 70,481Cash collected from interest1,132Cash
payments to suppliers(37,363)Cash payments for
expenses(32,499)Cash payments for income taxes(3,882)Net
cash provided by operating activities$ (2,131)
Sheet2
Sheet3
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Supplement B: Spreadsheet Approach
The spreadsheet approach offers a systematic way to keep track
of data. A spreadsheet is organized as follows:
Four columns to record dollar amounts are established
(beginning balance, debit changes, credit changes, and ending
balance).
On the far left of the top half of the spreadsheet, each account
name from the balance sheet is entered.
On the far left of the bottom half of the spreadsheet, the name
of each item that will be reported on the statement of cash flows
is entered.

*
Chapter Supplement B: Spreadsheet Approach—Statement of
Cash Flows: Indirect Method
The spreadsheet approach offers a systematic way to keep track
of data. A spreadsheet is organized as follows:
Four columns to record dollar amounts are established
(beginning balance, debit changes, credit changes, and ending
balance).
On the far left of the top half of the spreadsheet, each account
name from the balance sheet is entered.
On the far left of the bottom half of the spreadsheet, the name
of each item that will be reported on the statement of cash flows
is entered.
Let’s look at a spreadsheet that helps with the preparation of the
statement of cash flows for Boston Beer.
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After entering all the transactions illustrated in the textbook,
this is what the spreadsheet looks like.
*
After entering all the transactions, this is what the spreadsheet
looks like.

82,846$ 81,397
Sheet4Sales revenue+Decrease in accounts receivable-Increase
in accounts receivable=Cash collected from
customersInterest/Dividend revenue+Decrease in
taxes
Sheet5BOSTON BEER COMPANYChangesDec. 30,
2006DebitsCreditsMar. 31, 2007Balance SheetAssets:Cash and
equivalents63,147(n)1,69861,449Short-term
investments19,223(k)80220,025Accounts
receivable17,770(d)1,96719,737Inventories17,034(e)1,91718,95
1Prepaid expenses2,721(f)1,6774,398Equipment,
net31,879(i)1,736(b)1,72631,887(c)2Accounts
payable17,942(g)3,32014,622Accrued
expenses22,928(h)74422,184Contributed
capital81,237(l)2,729(m)5,69884,206Retained
earnings29,667(a)5,76835,435Statement of Cash
FlowsInflowsOutflowsSubtotalsCash flows from operating
activities:Net income(a)5,768Adj. to reconcile net income to net
cashprovided by operating activities:Depreciation and
amortization(b)1,726Changes in assets and liabilities:Accounts
receivable(d)1,967Inventory(e)1,917Prepaid
expense(f)1,677Accounts payable(g)3,320Accrued
expenses(h)744Net cash provided by operating
activities(2,131)Cash flows for investing activities:Proceeds

from sale of equipment(c)2Purchases of property, plant and
equipment(i)1,736Purchase of short-term investments(k)802Net
cash provided by investing activities(2,536)Cash flows from
financing activities:Purchase of treasury stock(l)2,729Proceeds
from issuance of stock(m)5,698Net cash used in financing
activities2,969Net decrease in cash & cash
equivalents(n)1,698Totals29,78429,784(1,698)
© 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
End of Chapter 13
End of chapter 13.
*
(in thousands)Three months ended
(unaudited)March 31, 2007
Cash flows from operating activities:
Net income5,768$
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 stock5,698
Net cash used in financing activities2,969
Net increase (decrease) in cash & cash equivalents(1,698)
Cash & cash equivalents at beginning of period63,147
Cash & cash equivalents at end of period61,449$
CONSOLIDATED STATEMENT OF CASH FLOWS
THE BOSTON BEER COMPANY, INC.
Proceeds from disposal of property,
plant & equipment
CategoryTransactionsCash EffectOther Account Affected
OperatingCollect accounts receivable+Cash-Accounts
Receivable (A)
Pay accounts payable-Cash-Accounts Payable (L)
Prepay rent-Cash+Prepaid Rent (A)
Pay interest-Cash-Retained Earnings (SE)
Sale for cash+Cash+Retained Earnings (SE)
InvestingPurchase equipment for cash-Cash+Equipment (A)
Sell investment securities for cash+Cash-Investments (A)
FinancingPay back debt to bank-Cash-Notes Payable-Bank (L)
Issue stock for cash+Cash
+Common Stock and
Selected Cash Transactions and Their Effect on Other Balance
Sheet Accounts
Change in Account Balance During Year
IncreaseDecrease
CurrentSubtract from netAdd to net income.
Assetsincome.
CurrentAdd to net income.Subtract from net
Liabilitiesincome.
(Unaudited)
March 31,Dec. 30,
In Thousands
20072006Changes

ASSETS
Current assets:
Cash & cash equivalents61,449$ 63,147$ (1,698)
Short-term investments20,025 19,223 802
Accounts Receivable19,737 17,770 1,967
Inventories18,951 17,034 1,917
Prepaid expenses4,398 2,721 1,677
Total current assets124,560 119,895
Equipment, net31,887 31,879 8
Total assets156,447$ 151,774$
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable14,622$ 17,942$ (3,320)
Accrued expenses22,184 22,928 (744)
Total current liabilities36,80640,870
Stockholders' Equity:
Contributed capital84,20681,2372,969
Retained earnings35,43529,6675,768
Total stockholders' equity119,641110,904
Total liabs & stockholders' equity156,447$ 151,774$
CONSOLIDATED BALANCE SHEET
(Unaudited)Three months ended
In Thousands March 30, 2007
Net sales72,448$
Cost of sales32,126
Gross profit40,322
Operating expenses:
Selling, general and administrative30,078
Depreciation and amortization1,726
Total operating expenses31,804
Operating income8,518
Interest income1,132
Income before provision for income taxes9,650
Provision for income taxes3,882
Net income$5,768

CONSOLIDATED STATEMENT OF INCOME
Change in Account Balance During Year
IncreaseDecrease
CurrentSubtract from netAdd to net income.
Assetsincome.
CurrentAdd to net income.Subtract from net
Liabilitiesincome.
(Unaudited)
March 31,Dec. 30,
In Thousands
20072006Changes
ASSETS
Current assets:
Inventories18,951 17,034 1,917
Total assets156,447$ 151,774$

Net income5,768$
Depreciation 1,726
Inventory (1,917)
2
plant & equipment
(Unaudited)
March 31,Dec. 30,
In Thousands
20072006Changes
ASSETS
Current assets:

Inventories18,951 17,034 1,917
Total assets156,447$ 151,774$
Net income5,768$
Depreciation 1,726
Inventory (1,917)
2

plant & equipment
Sales revenue
+Decrease in accounts receivable
-Increase in accounts receivable
=Cash collected from customers
Interest/Dividend revenue
+Decrease in interest/dividends
receivable
-Increase in interest/dividends
receivable
=Collections of interest/dividends
on investments
Cost of goods sold
+Increase in inventory
-Decrease in inventory
-Increase in accounts payable
+Decrease in accounts payable
=Cash payments to suppliers
Other expenses
+Increase in prepaid expenses
-Decrease in prepaid expenses
-Increase in accrued expenses
+Decrease in accrued expenses
=
Cash paid for expenses

Income tax expense
+Increase in prepaid income taxes
-Decrease in prepaid income taxes
-Increase in income taxes payable
+Decrease in income taxes payable
=Payments of income taxes
(Unaudited)Three months ended
In thousandsMarch 31, 2007
Cash collected from customers70,481$
Cash collected from interest1,132
Cash payments to suppliers(37,363)
Cash payments for expenses(32,499)
Cash payments for income taxes(3,882)
Net cash provided by operating activities(2,131)$
Dec. 30, 2006DebitsCreditsMar. 31, 2007
Balance Sheet
Assets:
Cash and equivalents63,147 (n)1,698 61,449
Short-term investments19,223 (k)802 20,025
Accounts receivable17,770 (d)1,967 19,737
Inventories17,034 (e)1,917 18,951
Prepaid expenses2,721 (f)1,677 4,398
Equipment, net31,879 (i)1,736 (b)1,726
31,887
(c)2
Accounts payable17,942 (g)3,320 14,622
Accrued expenses22,928 (h)744 22,184
Contributed capital81,237 (l)2,729 (m)5,698
84,206
Retained earnings29,667 (a)5,768 35,435
Statement of Cash FlowsSubtotals
Net income(a)5,768

Adj. to reconcile net income to net cash
Depreciation and amortization(b)1,726
Accounts receivable (d)1,967
Inventory (e)1,917
Prepaid expense (f)1,677
Accounts payable (g)3,320
Accrued expenses (h)744
Proceeds from sale of equipment(c)2
Purchases of property, plant and equipment(i)1,736
Purchase of short-term investments(k)802
Purchase of treasury stock(l)2,729
Proceeds from issuance of stock(m)5,698
Net decrease in cash & cash equivalents(n)1,698
Totals
29,784 29,784 (1,698)
BOSTON BEER COMPANY
Changes
InflowsOutflows
CHAPTER 9The Statement of Cash Flows
Learning Objectives
1. Identify the purposes of the statement of cash flows
2. Report cash flows from operating, investing and financing
activities
3. Prepare a statement of cash flows by the direct method

4. Compute the cash effects of a wide variety of business
transactions
5. Prepare a statement of cash flows by the indirect method
Outline
Objective 1: Identify the purposes of the statement of cash
flows
A.
The statement of cash flows reports the entity’s cash flow (cash
receipts and cash payments) during the period—where the cash
came from, and how it was spent.
B.
The period of time covered by the statement of cash flows and
the income statement is the same.
C.
The purposes of the statement are:
1.
to predict future cash flows,
2.
to evaluate management decisions,
3.
to determine the ability to pay dividends to stockholders and
principal and interest to creditors, and
4.
to show the relationship of net income to changes in cash.
D.

Cash includes cash on hand, cash in the bank, and cash
equivalents. Cash equivalents are very liquid short-term
investments such as money market investments and Treasury
bills.
Objective 2: Report cash flows from operating, investing, and
financing activities
A.
Cash flows are classified as operating, investing, or financing
activities.
1.
Operating activities create revenues and expenses. The
statement shows the cash inflows and outflows from these
activities.
a.
Operating activities relate to transactions that make up net
income.
b.
Cash flow from operating activities is the most important source
of cash for a business.
2.
Investing activities are increases and decreases in assets other
than those involved in operating activities. The statement
shows the cash inflows and outflows from these activities.
a.
Investing activities relate to long-term asset accounts.
b.
Investments in fixed assets suggest a strong company.

3.
Financing activities involve obtaining funds from investors and
creditors. The statement shows the cash flows from these
activities.
a.
Financing activities relate to long-term liabilities and owners’
equity accounts.
b.
Both stock transactions and debt transactions are financing
activities; however, paying interest on debt is considered an
operating activity (because interest expense is a part of net
income), while paying dividends on stock is considered a
financing activity.
B.
The FASB approved two formats for reporting operating
activities—the direct method and indirect method.
1.
The direct method lists cash receipts from specific operating
activities and cash payments for each major operating activity.
The FASB prefers the direct method.
2.
The indirect method begins with net income and reconciles to
cash flows from operating activities. Because most companies
use an accrual method, many companies find the indirect
method easier to use.
3.
The total for operating activities and the total change in cash is
the same for both methods. The investing activities and
financing activities are exactly the same for both methods.

Objective 3: Prepare a statement of cash flows by the direct
method
A.
Preparation of the statement of cash flows involves these steps:
1.
Identify the activities that increase or decrease cash.
2.
Classify each activity as operating, investing, or financing.
3.
Identify the cash effect of each transaction.
B.
Cash flows from operating activities include:
1.
Cash receipts:
a.
Cash collections from customers
b.
Cash receipts of interest and dividends
2.
Cash payments:
a.
Cash payments to suppliers for both inventory and operating
expenses
b.
Cash payments to employees

c.
Cash payments for interest and income taxes
3.
Depreciation, depletion, and amortization expense do not affect
cash, and so are not listed on the statement of cash flows (direct
method).
C.
Cash flows from investing activities include:
1.
Cash receipts:
a.
Proceeds from the sale of plant assets
b.
Proceeds from the sale of investments that are not cash
equivalents
c.
Cash receipts from the collection of loans (principal only)
2.
Cash payments:
a.
Payments for the acquisition of plant assets
b.
Payments for the acquisition of investments that are not cash
equivalents
c.

Making loans
D.
Cash flows from financing activities include:
1.
Cash receipts:
a.
Proceeds from the issuance of stock
b.
Proceeds from the sale of treasury stock
c.
Borrowing money (notes and bonds payable)
2.
Cash payments:
a.
Payments to retire the company’s own stock
b.
Payments for the purchase of treasury stock
c.
Repayment of debt (principal only)
d.
Payments of dividends
E.
Computerized accounting systems can easily generate the
statement of cash flows from information already available in
the accounts.

Objective 4:
Compute the cash effects of a wide variety of business
transactions
A. Cash flow from operating activities is computed by using the
following approach:
+
Purchases
-
Payments
=
Revenue or expense
Adjustment for the
Amount for the
from the
change in the related
=
statement of
income statement
sheet account(s)
cash flows

1.
Collections from customers must be computed by converting
sales revenue (accrual basis) to the cash basis:
a.
Computation:
Beginning
Ending
accounts
+ Sales – Collections =
accounts
receivable
receivable
b.
An increase in Accounts Receivable means that sales revenue is
greater than collections. A decrease means that collections are
greater than sales.
2.
Payments to suppliers involve adjusting cost of goods sold
(accrual basis) to the cash basis:
a.
Compute purchases:

Beginning
Ending
inventory
inventory
b.
Compute payments for inventory:
Beginning
Ending
accounts
accounts
payable
payable
c.
An increase in Inventory means that purchases were greater than
the cost of goods sold. An increase in Accounts Payable means
that purchases were greater than the cash payments.
3.

Operating expenses often include noncash expenses, expenses
that have not been paid, accrued liabilities, and expense paid in
advance (prepaid). Cash payments for operating expenses
adjust operating expenses (accrual basis) to the cash basis.
a.
Compute payments of prepaid expenses:
Beginning
Ending
prepaid
+ Payments
=
prepaid
expensesexpense
b.
An increase in Prepaid Expenses means that payments for
prepaids were greater than the expenses recorded.
c.
Compute payments of accrued liabilities:

Beginning
Ending
accrued
- Payments
=
accrued
liabilitiesliabilities
d.
An increase in Accrued Liabilities means that expenses incurred
were greater than cash payments.
e.
Using the information gathered above, compute the payments
for operating expenses:
Accrual of
expense at
-
+
Payments =

year end
f.
Total payments for operating expenses = payments in a., c., and
e. above.
4.
Payments to employees is determined by analyzing the salary or
wage payable account.
a.
Computation: +
Payments
Beginning
Ending
salary/wage
+ Salary/wage expense - Payments =
salary/wage
payable
payable
b.

An increase in Salary/Wage Payable means that expenses were
greater than the cash payments.
5.
Payments for interest and income taxes follow the pattern
illustrated for payments to employees.
B.
Cash flow from investing activities can be identified by
analyzing assets accounts.
1.
An increase in an asset account (for example, Land) indicates
that an asset has been acquired. This is reported as a cash
outflow (use of cash).
2.
A decrease in an asset account indicates that an asset has been
sold. The amount of the decrease may not equal the amount of
cash received (the cash inflow or source of cash) because the
asset might have been sold at a price greater than or less than
its book value.
3.
Computation:
Beginning
Book value
Ending

plant asset
+ Acquistions
- Depreciation
-
of plant
=
plant asset
balance (net)
assets sold
balance (net)
4.
Sale proceeds = Book value of asset sold + Gain - Loss
5.
The computation for investments is:
Beginning
Book value of
Ending
investment

+ Purchases
-
investments
=
investment
balance
sold
balance
6.
The computation for loans and notes receivable is:
Beginning
New loans
Ending
Note receivable
made
note receivable
C.
Cash flow from financing activities can be identified by
analyzing liability and stockholders’ equity accounts.
1.
An increase in liability or stockholders' equity account indicates
that stock or debt has been issued. This is reported as a cash

inflow (source of cash).
2.
A decrease in a liability or stockholders' equity account
indicates that debt or stock has been retired. This is reported as
a cash outflow (use of cash).
3.
Computation of debt issuances and payments:
Beginning
Payment
Ending
long-term debt
+ Issuances of new debt -
of
=
long-term debt
balance

debt
balance
4.
Computation of stock issuances and retirements:
Beginning
Ending
stock
+ Issuances of new stock - Retirements
=
stock
balance
balance
5.

Computation of treasury stock purchases and sales:
Beginning
Ending
treasury stock
+ Purchases - Cost of treasury stock sold
=
treasury stock
balance
balance
6.
Computation of dividend payments:
a.
First, calculate the amount of dividends declared:

Beginning
Ending
retained earnings
+ Net income - Dividends declared
=
retained earnings
balance
balance
b.
Then calculate the amount of cash payments for dividends:
Beginning

Ending
dividends
+
=
dividends
payable
payable
D.
Noncash investing and financing activities, such as acquisition
of plant assets by issuing long-term debt, are reported in a
separate schedule that accompanies the statement of cash flows.
F.
The FASB requires that a reconciliation of net income to net
cash flow from operating activities be present when the direct
method is used. This reconciliation is the same as the cash flow
from operating activities using the indirect method.
Objective 5: Prepare a statement of cash flows by the indirect
method
A.
Investing and financing activities are the same under both

methods.
B.
The indirect method begins with accrual-basis net income and
makes adjustments to that number to arrive at net cash flow
from operating activities.
C.
The following items are included as adjustments to net income
1.
Add depreciation, depletion, amortization, and any other
expenses that reduce net income but not cash. Deduct revenues
that do not provide cash, such as equity-method investment
revenue.
2.
Add losses and subtract gains on the sale of assets because they
alsoaffect income without affecting cash.
3.
Add decreases in most current assets other than cash, because a
decrease in a current asset means that the cash increase is not
reflected in accrual-basis net income.
4.
Subtract increases in most current assets other than cash,
because an increase in a current asset, such as Inventory,
indicates that the decrease in cash is not a decrease in accrual-
basis net income.
5.
Add increases in most current liabilities, because increases in
current liabilities indicate that accrual-basis net income was
reduced more than the cash payments.
6.

Subtract decreases in most current liabilities, because decreases
in current liabilities indicate that cash payments were greater
than that reflected in accrual-basis net income.
7.
Most current assets and liabilities result from operating
activities. Exceptions are short-term investments and dividends
payable.
D.
Cash-flow information may be critical in helping to determine if
a company is financially sound. Profitable companies usually
have healthy cash flows. A negative cash flow warrants
investigation.
E.
Decision guidelines provide investors and creditors with a few
suggestions on how to use cash-flow information.
+
-
+ Purchases – Cost of goods sold =
� EMBED Word.Picture.8 ��
-

Expiration of
prepaid expense
+ Accrual of expense at year end
Expiration of Ending
prepaid expense balance
+
- Collections =
Dividend Dividend
declarations payments

-
17-8
_1055329904.doc
+
Purchases - Payments =

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