Statement of Cash Flows: Direct Method

Chapter 13

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

(Unaudited) Three months endedIn thousands March 31, 2007Cash 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)$

CONSOLIDATED STATEMENT OF CASH FLOWSTHE BOSTON BEER COMPANY, INC.

Remember that when we prepared the operating section using the indirect method, we also arrived at net cash inflow of $2,131.

Process of Determining Cash Flows Directly

• Start with the Income Statement and account for each item on the income statement.

• Example: Look at the Income Statement for P13-1

Income Statement for 2011

Sales $195,000

Cost of Goods Sold $ (92,000)

Depreciation Expense $ (13,250)

Other Expenses $ (43,000)

Net Income $ 46,750

Process of Determining Cash Flows Directly

• Convert each item on the income statement to Cash flow

• Start with SALES: convert to Cash Received From CustomersSales + Beginning A/R – Ending A/R

Process of Determining Cash Flows Directly

• Cost of Goods Sold to Cash Paid to Suppliers

• What were purchases of Inventory?Recall: BI + Purchases – EI = COGSYou know BI, EI and COGS so you can calculate PurchasesPurchases = COGS +EI –BI

• Convert Purchases to CASH PURCHASES:Purchases + Beg A/P – End A/P

Process of Determining Cash Flows Directly

• ALL Other Expenses– If the Expense is different from the Cash Payment, there will be an

associated Payable or Prepaid Expense.

– If there is a related Payable Account, you assume you pay the beginning balance with cash and do not pay the ending balance. So…

– Cash Payment for Expense = Expense + Beg payable – End Payable

– If there is a related PREPAID Account, any cash you paid for the expense is the amount of the cash flow (look for increases to the account). The use of prepaid expense is not a cash expense.• This information would need to be described in the ADDITIONAL

INFORMATION.

Process of Determining Cash Flows Directly

• Other Revenues (Dividends and Interest)– Determine the amount paid for dividends (should

be given in the additional information).

– You can assume interest revenue is equal to interest received unless you see interest receivable. If there is interest receivable, assume you receive the beginning balance and do not receive the ending balance of the receivable.

Required Supplemental Information

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

2. Cash paid for income taxes and interest.

3. Significant noncash investing and financing activities.

Required Supplemental Information

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

2. Cash paid for income taxes and interest.

3. Significant noncash investing and financing activities.

Additional Cash Flow Disclosures

Significant noncash investing and financing transactions do not involve cash.

Example: Purchase of a building with a mortgage.