MF

Jdr
StatementofCashFlows.ppt
Home>Business & Finance homework help>Management homework help>MF

Statement of Cash Flows

Chapter 13

McGraw-Hill/Irwin

© 2009 The McGraw-Hill Companies, Inc.

Chapter 13: Statement of Cash Flows

*

13-*

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.

13-*

Cash

  • Short-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.

13-*

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.

13-*

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.

13-*

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

*

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.

13-*

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.

13-*

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 equipment
  • Purchase 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.

13-*

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 owners
  • Dividends 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.

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 31, 2007
Cash 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)
Proceeds from disposal of property, plant & equipment 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

13-*

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.

13-*

Relationships to the Balance Sheet and the Income Statement

 Cash = Liabilities Stockholders’ Equity Noncash Assets

Derives from . . .

Assets = Liabilities Stockholders’ Equity

*

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.

13-*

Relationships to the Balance Sheet and the Income Statement

*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

13-*

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.

13-*

Use this table when adjusting Net Income to Operating Cash Flows using the indirect method.

Reporting Cash Flows from Operating Activities—Indirect 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.

Sheet1

Change in Account Balance During Year
Net Cash Flows from Operating Activities Increase Decrease
+ Net Cash Flows from Investing Activities Current Subtract from net Add to net income.
+ Net Cash Flows from Financing Activities Assets income.
= Net Cash Flows for the Period Current Add to net income. Subtract from net
+ Beginning of Period Cash Balance Liabilities income.
= End of Period Cash Balance
&A
Page &P

13-*

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.

13-*

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 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.

13-*

*

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

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 31, Dec. 30,
In Thousands 2007 2006 Changes
ASSETS
Current assets:
Cash & cash equivalents $ 61,449 $ 63,147 (1,698)
Short-term investments 20,025 19,223 802
Accounts Receivable 19,737 17,770 1,967
Inventories 18,951 17,034 1,917
Prepaid expenses 4,398 2,721 1,677
Total current assets 124,560 119,895
Equipment, net 31,887 31,879 8
Total assets $ 156,447 $ 151,774
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,622 $ 17,942 (3,320)
Accrued expenses 22,184 22,928 (744)
Total current liabilities 36,806 40,870
Stockholders' Equity:
Contributed capital 84,206 81,237 2,969
Retained earnings 35,435 29,667 5,768
Total stockholders' equity 119,641 110,904
Total liabs & stockholders' equity $ 156,447 $ 151,774

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) Three months ended
In Thousands March 30, 2007
Net sales $ 72,448
Cost of sales 32,126
Gross profit 40,322
Operating expenses:
Selling, general and administrative 30,078
Depreciation and amortization 1,726
Total operating expenses 31,804
Operating income 8,518
Interest income 1,132
Income before provision for income taxes 9,650
Provision for income taxes 3,882
Net income $5,768

Sheet2

Sheet3

13-*

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.

13-*

(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.

13-*

*

We use this table to help remember whether to add or subtract the change in the current asset and current liability accounts.

Sheet1

Change in Account Balance During Year
Net Cash Flows from Operating Activities Increase Decrease
+ Net Cash Flows from Investing Activities Current Subtract from net Add to net income.
+ Net Cash Flows from Financing Activities Assets income.
= Net Cash Flows for the Period Current Add to net income. Subtract from net
+ Beginning of Period Cash Balance Liabilities income.
= End of Period Cash Balance
&A
Page &P

13-*

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.

13-*

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.

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 31, Dec. 30,
In Thousands 2007 2006 Changes
ASSETS
Current assets:
Cash & cash equivalents $ 61,449 $ 63,147 (1,698)
Short-term investments 20,025 19,223 802
Accounts Receivable 19,737 17,770 1,967
Inventories 18,951 17,034 1,917
Prepaid expenses 4,398 2,721 1,677
Total current assets 124,560 119,895
Equipment, net 31,887 31,879 8
Total assets $ 156,447 $ 151,774
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,622 $ 17,942 (3,320)
Accrued expenses 22,184 22,928 (744)
Total current liabilities 36,806 40,870
Stockholders' Equity:
Contributed capital 84,206 81,237 2,969
Retained earnings 35,435 29,667 5,768
Total stockholders' equity 119,641 110,904
Total liabs & stockholders' equity $ 156,447 $ 151,774

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 31, 2007
Cash 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)
Proceeds from disposal of property, plant & equipment 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 31, 2007
Cash 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)
Proceeds from disposal of property, plant & equipment 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

13-*

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.

13-*

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.

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 31, Dec. 30,
In Thousands 2007 2006 Changes
ASSETS
Current assets:
Cash & cash equivalents $ 61,449 $ 63,147 (1,698)
Short-term investments 20,025 19,223 802
Accounts Receivable 19,737 17,770 1,967
Inventories 18,951 17,034 1,917
Prepaid expenses 4,398 2,721 1,677
Total current assets 124,560 119,895
Equipment, net 31,887 31,879 8
Total assets $ 156,447 $ 151,774
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,622 $ 17,942 (3,320)
Accrued expenses 22,184 22,928 (744)
Total current liabilities 36,806 40,870
Stockholders' Equity:
Contributed capital 84,206 81,237 2,969
Retained earnings 35,435 29,667 5,768
Total stockholders' equity 119,641 110,904
Total liabs & stockholders' equity $ 156,447 $ 151,774

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 31, 2007
Cash 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)
Proceeds from disposal of property, plant & equipment 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

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.

*

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.

13-*

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.

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

Revenue or Expense Item
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

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

Revenue or Expense Item
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

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

Revenue or Expense Item
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

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

Revenue or Expense Item
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

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

Revenue or Expense Item
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

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) Three months ended
In thousands March 31, 2007
Cash flows from operating activities:
Cash collected from customers $ 70,481
Cash collected from interest 1,132
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)

Sheet2

Sheet3

13-*

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.

13-*

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.

Sheet1

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Three months ended
(unaudited) March 27, 2004
Cash flows from operating activities:
Net income $1,271
Adj. 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 2,770
Cash 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

Sheet2

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts
Category Transactions Cash Effect Other Account Affected
Operating Collect 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)
Investing Purchase equipment for cash -Cash +Equipment (A)
Sell investment securities for cash +Cash -Investments (A)
Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)
Issue stock for cash +Cash +Common Stock and Paid-in-Capital (SE)

Sheet3

THE BOSTON BEER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited) March 27, Dec. 27,
In Thousands 2004 2003 Changes
ASSETS
Current 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' EQUITY
Current 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 1,184
Retained earnings 37,846 36,575 1,271
Total stockholders' equity 61,953 59,498
Total liabs & stockholders' equity $ 82,846 $ 81,397

Sheet4

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

Sheet5

BOSTON BEER COMPANY
Changes
Dec. 30, 2006 Debits Credits Mar. 31, 2007
Balance Sheet
Assets:
Cash and equivalents 63,147 (n) 1,698 61,449
Short-term investments 19,223 (k) 802 20,025
Accounts receivable 17,770 (d) 1,967 19,737
Inventories 17,034 (e) 1,917 18,951
Prepaid expenses 2,721 (f) 1,677 4,398
Equipment, net 31,879 (i) 1,736 (b) 1,726 31,887
(c) 2
Accounts payable 17,942 (g) 3,320 14,622
Accrued expenses 22,928 (h) 744 22,184
Contributed capital 81,237 (l) 2,729 (m) 5,698 84,206
Retained earnings 29,667 (a) 5,768 35,435
Statement of Cash Flows Inflows Outflows Subtotals
Cash flows from operating activities:
Net income (a) 5,768
Adj. to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (b) 1,726
Changes in assets and liabilities:
Accounts receivable (d) 1,967
Inventory (e) 1,917
Prepaid expense (f) 1,677
Accounts payable (g) 3,320
Accrued expenses (h) 744
Net cash provided by operating activities (2,131)
Cash flows for investing activities:
Proceeds from sale of equipment (c) 2
Purchases of property, plant and equipment (i) 1,736
Purchase of short-term investments (k) 802
Net cash provided by investing activities (2,536)
Cash flows from financing activities:
Purchase of treasury stock (l) 2,729
Proceeds from issuance of stock (m) 5,698
Net cash used in financing activities 2,969
Net decrease in cash & cash equivalents (n) 1,698
Totals
29,784 29,784 (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

Paid-in-Capital (SE)

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$

THE BOSTON BEER COMPANY, INC.

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

THE BOSTON BEER COMPANY, INC.

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:

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$

THE BOSTON BEER COMPANY, INC.

CONSOLIDATED BALANCE SHEET

(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

(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$

THE BOSTON BEER COMPANY, INC.

CONSOLIDATED BALANCE SHEET

(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

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 flows from operating activities:

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)$

CONSOLIDATED STATEMENT OF CASH FLOWS

THE BOSTON BEER COMPANY, INC.

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

Cash flows from operating activities:

Net income(a)5,768

Adj. to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization(b)1,726

Changes in assets and liabilities:

Accounts receivable (d)1,967

Inventory (e)1,917

Prepaid expense (f)1,677

Accounts payable (g)3,320

Accrued expenses (h)744

Net cash provided by operating activities(2,131)

Cash flows for investing activities:

Proceeds from sale of equipment(c)2

Purchases of property, plant and equipment(i)1,736

Purchase of short-term investments(k)802

Net cash provided by investing activities(2,536)

Cash flows from financing activities:

Purchase of treasury stock(l)2,729

Proceeds from issuance of stock(m)5,698

Net cash used in financing activities2,969

Net decrease in cash & cash equivalents(n)1,698

Totals

29,784 29,784 (1,698)

BOSTON BEER COMPANY

Changes

InflowsOutflows