Statement of Cash Flows: Direct Method
Chapter 13
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
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)
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 Customers
Sales + 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 = COGS
You know BI, EI and COGS so you can calculate
Purchases
Purchases = 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.
Additional Cash Flow Disclosures
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.
Significant noncash investing and financing
transactions do not involve cash.
Example: Purchase of a building with a mortgage.