Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-21
in whole or in part.
3.26 Preparing a Statement of Cash Flows from Balance Sheets and Income State-
ments.
a. Worksheets for the preparation of statements of cash flows for Year 2, Year 3,
and Year 4 appear on the following pages.
c. Cash flow from operations exceeded net income during Year 2 because of the
addbacks for depreciation and deferred taxes. Changes in current assets slightly
exceeded changes in current liabilities, suggesting effective working capital
management. Cash flow from operations was insufficient to fund expenditures
payment time. The firm substantially increased its purchase of property, plant,
and equipment during Year 3, financing its purchases with cash flow from oper-
ations and additional long-term debt. The use of operating cash flows to finance
purchases of fixed assets is generally undesirable if it occurs as it does in this
case from stretching short-term suppliers.
al long-term debt and partly with issuances of common stock.
d. The cash flow problems of Flight Training Corporation can be traced to
expanding fixed assets too rapidly, relative to increases in sales, and to using
cash flow from operations, in part, to finance the purchases. Sales increased
76.3% [($36,597/$20,758) – 1] between Year 2 and Year 3 while fixed
ple, jet fuel) and services (for example, pilots’ services) needed to remain in
business.
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-22
in whole or in part.
Worksheet for Statement of Cash Flows for Flight Training Corporation
Year 2
(amounts in thousands)
(Problem 3.26)
Balance Sheet
Changes Operations Investing Financing
(Increase) Decrease in Assets
Accounts Receivable ……………….. $ (185) $ (185)
Inventories……………………………… (950) (950)
Prepayments …………………………… (412) (412)
Increase (Decrease) in Liabilities
and Shareholders’ Equities
Accounts Payable ……………………. 54 54
Notes Payable …………………………. (881) $ (881)
Current Portion of Long-Term
Debt ………………………………….. 685 685
Other Current Liabilities ………….. 1,113 1,113
Long-Term Debt …………………….. 3,066 3,066
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-23
in whole or in part.
Worksheet for Statement of Cash Flows for Flight Training Corporation
Year 3
(amounts in thousands)
(Problem 3.26)
Balance Sheet
Changes Operations Investing Financing
(Increase) Decrease in Assets
Accounts Receivable ……………….. $(2,199) $ (2,199)
Inventories……………………………… (962) (962)
Prepayments …………………………… (360) (360)
Increase (Decrease) in Liabilities
and Shareholders’ Equities
Accounts Payable ……………………. 5,286 5,286
Notes Payable …………………………. 805 $ 805
Current Portion of Long-Term
Debt ………………………………….. 5,229 5,229
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-24
in whole or in part.
Worksheet for Statement of Cash Flows for Flight Training Corporation
Year 4
(amounts in thousands)
(Problem 3.26)
Balance Sheet
Changes Operations Investing Financing
(Increase) Decrease in Assets
Accounts Receivable ……………….. $ (1,671) $ (1,671)
Inventories……………………………… (2,592) (2,592)
Increase (Decrease) in Liabilities
and Shareholders’ Equities
Accounts Payable ……………………. 6,149 6,149
Notes Payable …………………………. (945) $ (945)
Current Portion of Long-Term
Debt ………………………………….. 53,572 53,572
Other Current Liabilities ………….. 779 779
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-25
in whole or in part.
Flight Training Corporation
Statement of Cash Flows
(amounts in thousands)
(Problem 3.26)
Year Ended December 31:
Year 2 Year 3 Year 4
Operations
Net Income (Loss) ……………………………. $ 739 $ 594 $ (3,831)
Depreciation…………………………………….. 1,425 3,130 8,388
Deferred Income Taxes …………………….. 803 97 (900)
(Increase) Decrease in Accounts
Investing
Acquisition of Property, Plant, and
Equipment ……………………………………. $ (6,230) $ (52,936) $ (29,554)
Other Investing Transactions ……………… 471 (24) 195
Cash Flow from Investing ………… $ (5,759) $ (52,960) $ (29,359)
Financing
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-26
in whole or in part.
3.27 Preparing a Statement of Cash Flows from Balance Sheets and Income State-
ments.
a. Worksheets for the preparation of statements of cash flow for Year 8 and Year 9
appear on the following pages.
creditors forced the firm to repay. BTB obtained the cash needed to finance the
operating cash flow shortfall and capital expenditures by increasing short- and
long-term debt and issuing preferred stock.
BTB experienced a net loss in Year 9, but its cash flow from operations
short-term borrowing.
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-27
in whole or in part.
BTB, Inc.
Worksheet for Statement of Cash Flows
for Year 8
(amounts in thousands)
(Problem 3.27)
Balance Sheet
(Increase) Decrease in Changes Operations Investing Financing
Assets
Accounts Receivable ………… $ (168) $ (168)
Inventories………………………. (632) (632)
Increase (Decrease) in Liabilities
and Shareholders’ Equities
Accounts Payable …………….. $ (769) (769)
Notes Payable to Banks ……. 220 $ 220
Other Current Liabilities …… (299) (299)
Long-Term Debt ……………… 2,339 2,339
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-28
in whole or in part.
BTB, Inc.
Worksheet for Statement of Cash Flows
for Year 9
(amounts in thousands)
(Problem 3.27)
Balance Sheet
Changes Operations Investing Financing
(Increase) Decrease in
Assets
Accounts Receivable ………… $ 1,391 $ 1,391
Inventories………………………. 872 872
Increase (Decrease) in Liabilities
and Shareholders’ Equity
Accounts Payable …………….. $ (13) $ (13)
Notes Payable to Banks ……. 2,182 $ 2,182
Other Current Liabilities …… (82) (82)
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-29
in whole or in part.
Integrative Case 3.1: Starbucks
a. Starbucks recognizes income from equity investees in its income statement each
year. Refer to Exhibit 1.27, which shows equity income of $148.1 million in 2010,
$173.7 million in 2011, and $210.7 million in 2012. The subtractions from net in-
cash received.
b. 2012 2011 2010
Income from Equity Investees ………………………. $ 210.7 $ 173.7 $ 148.1
Subtraction in Statement of Cash Flows for
approximately 77–88% of the income recognized.
c. U.S. GAAP and IFRS require firms to recognize an expense each year for the cost
of providing benefits to employees in stock option plans. The recognition of an ex-
pense results in a simultaneous increase in additional paid-in capital (although cash
ceiving a stock option before they can exercise it. Moreover, for numerous reasons
(for example, vesting periods, exercise patterns of individual employees, and strike
price relative to option value), it would be a rare coincidence for the expense rec-
ognized in a year to equal the option exercise proceeds.
ties.
e. Cash flow from operations was more than sufficient to finance acquisitions of
property, plant, and equipment each year. Starbucks issued additional common
stock each year, most likely to employees holding stock options. To avoid dilution
Chapter 3
Income Flows versus Cash Flows:
Understanding the Statement of Cash Flows
3-30
in whole or in part.
repurchases and a one-time issuance of long-term debt). This is characteristic of a
mature, profitable firm.
f. 2012 2011 2010
Net Income ………………………………………………. $ 1,384.7 $ 1,248.0 $ 948.3
Interest Expense ……………………………………….. 32.7 33.3 32.7
g. 2012 2011 2010
b. Net Income ………………………………………………. $ 1,384.7 $ 1,248.0 $ 948.3
EBITDA and cash flow from operations, which contrasts with the popular belief
that EBITDA is a good proxy for operating cash flows.
h. The addbacks for depreciation and amortization on the statement of cash flows are
fixed assets in company operated retail stores. For manufacturing firms, the discre-
pancy is much larger because the cost of equipment and manufacturing facilities is
directly allocated to the cost of manufacturing products.