Indirect Method Statement of Cash Flows
Indirect Method Statement of Cash Flows
Indirect Method Statement of Cash Flows
Charles W. Mulford
Amounts in (000s)
Interest income 97 50
Earnings before income taxes 7,072 3,805
Income taxes 2,762 1,199
Net earnings $ 4,310 $ 2,606
C. Mulford, Cash Flow Construction, page: 4
Current liabilities:
Accounts payable $ 399 $ 514
Accrued expenses 424 283
Income taxes payable 180 -
Shareholders equity:
Common stock 6,791 6,832
Retained earnings (deficit) 3,052 (1,258)
Treasury stock (68) -
Total shareholders equity 9,775 5,574
$ 10,778 $ 6,371
C. Mulford, Cash Flow Construction, page: 5
Lacks detail
Provides detail
Financing Expenditures:
Investing Expenditures:
Financing Expenditures:
Detailed partitioning
The cash effects of transactions that enter into the determination of net income
such as cash receipts from sales of goods and services and cash payments to
suppliers and employees for acquisitions of inventory and services. Excluded are
gains and losses related to investing activities, such as sales of investments or
fixed assets, or related to financing activities, such as early debt retirement.
Cash receipts and payments involving long-term assets, including making and
collecting loans and acquiring and disposing of investments and property, plant
and equipment.
Cash receipts and payments involving liability and stockholders' equity items,
including obtaining cash from creditors and repaying amounts borrowed and
obtaining capital from owners and providing them with a return on and a return of,
their investments.
C. Mulford, Cash Flow Construction, page: 16
O Operating,
I - Investing, or
F - Financing
O Operating,
I - Investing, or
F - Financing
_____ 1. Increases in book overdrafts, the excess of outstanding checks over cash balances
reported by the bank.
_____ 2. Cash used in the operations of a discontinued segment during the period leading up
to disposition.
_____ 5. Cash provided by an outsized increase in the time taken to satisfy accounts payable.
_____ 7. Tax benefits received as the result of the sale of an investment at a loss.
_____ 8. Cash tied up in notes receivable taken from customers at the time of sale.
_____ 10. Cash provided from the liquidation of inventory acquired in a corporate acquisition.
_____ 11. Taxes paid on a gain realized when long-term debt was settled early.
_____ 12. Proceeds received when accounts receivable were pledged as collateral for a loan.
C. Mulford, Cash Flow Construction, page: 18
_____ 15. Cash received from the sale of a building to be leased back.
_____ 16. Insurance proceeds resulting from damage sustained by property, plant and
equipment.
Current liabilities:
Notes payable $ - $ 2,595 (2,595)
Accounts payable 7,567 9,431 (1,864)
Income taxes 2,124 186 1,938
Other accrued liabilities 16,419 14,436 1,983
Current portion of long-term debt 401 3,643 (3,242)
Total current liabilities 26,511 30,291
Shareholders equity:
Common stock 886 883 3
Additional paid-in capital 7,146 6,714 432
Retained earnings 56,341 44,668 11,673
Less treasury stock (5,260) - (5,260)
59,113 52,265
Total liabilities and shareholders equity $ 102,606 $ 100,958 1,648
Adjust for:
(Increase) Decrease in operating-related assets
Accounts receivable
Inventory
Prepaid expenses
Deferred tax assets
Other assets operating-related only
Beginning Ending
Depreciable assets - cost $1,000 $ 1,000
Accumulated depreciation (600) (700)
Depreciable assets - book value $ 400 $ 300
Beginning Ending
Depreciable assets - cost $1,000 $ 1,400
Accumulated depreciation (600) (800)
Depreciable assets - book value $ 400 $ 600
Depreciable assets were purchased during the year for $400. Depreciation of $200
was recorded during the year.
Beginning Ending
Depreciable assets - cost $ 2,000 $ 1,900
Accumulated depreciation (800) (700)
Depreciable assets - book value $ 1,200 $ 1,200
Depreciable assets were purchased during the year for $900. Depreciable assets
with cost of $1,000 and accumulated depreciation of $300 were sold for $600. A
loss on sale of $100 was recorded. Depreciation of $200 was recorded during the
year.
Capital expenditures net consist of depreciable assets purchased for $(900) and
proceeds from sale of depreciation assets of $600.
C. Mulford, Cash Flow Construction, page: 27
Common stock $ 3
Additional paid-in capital 432
Common stock financing 435
Dividends paid:
Beginning R/E $ 44,668
Plus net income 12,550
Minus ending R/E -56,341
Dividends paid (877)
Special note:
Depreciation expense in the amount of $7,519 is included in cost of goods sold.
Other current assets and current liabilities are operating-related. Other noncurrent
liabilities are financing-related.
Calculations:
C. Mulford, Cash Flow Construction, page: 32
Shareholders equity:
Common stock 34,100 32,535 1,565
Additional paid-in capital 43,687 41,715 1,972
Retained earnings (accumulated deficit) 4,740 (24,764) 29,504
Cumulative translation adjustment 15 (169) 184
Total shareholders equity 82,542 49,317
$ 136,775 $ 100,653 36,122
C. Mulford, Cash Flow Construction, page: 34
Special note:
No income statement is provided. Net income for 2016 was $5,790. Deducted in
arriving at this amount were depreciation of fixed assets for $1,616 and
amortization of intangibles for $403. A gain on early retirement of debt for $424
was included in net income.
Computations:
C. Mulford, Cash Flow Construction, page: 35
DHTK Corp.
Balance Sheet
(amounts in thousands)
2016 2015 Inc. (Dec.)
Assets
Current Assets:
Cash and equivalents $ 26,671 $ 22,289 4,382
Accounts receivable, net 6,825 7,245 (420)
Inventories 6,595 5,526 1,069
Deferred tax benefit 354 95 259
Prepaid expenses 557 418 139
Total current assets 41,002 35,573
Current liabilities:
Accounts payable $ 2,819 $ 3,425 (606)
Current portion of long term debt 786 1,168 (382)
Notes payable -- 742 (742)
Accrued payroll, payroll taxes and benefits 751 651 100
Accrued expenses 1,088 785 303
Income taxes payable 664 733 (69)
Accrued warranty 332 269 63
Deferred revenue 16 121 (105)
Total current liabilities 6,456 7,894
Shareholders equity:
Common stock 8,928 8,347 581
Retained earnings 30,974 25,184 5,790
Total shareholders equity 39,902 33,531
$ 48,162 $ 44,113 4,049
C. Mulford, Cash Flow Construction, page: 36
Gains on assets sales should be entered as a use in the operating section and a
source in the investing section.
Losses on asset sales should be entered as a source in the operating section and a
use in the investing section.
Gains on debt retirement should be entered as a use in the operating section and a
source in the financing section.
Complete the worksheet by entering all balance sheet changes in proper sections,
operating, investing or financing.
Pay attention to whether other assets and liabilities are operating, investing or
financing-related.
C. Mulford, Cash Flow Construction, page: 37
Income statement and balance sheet data for Jewels Jewelers, Inc. are provided
below. Use the blank worksheet provided to prepare a cash flow statement in the
indirect format for the year ended January 31, 2016.
For the year ended January 31, 2016 the provision for depreciation and
amortization of property and equipment amounted to $1,634 (in 000s).
Other current liabilities are operating related. Other noncurrent liabilities are
financing related.
Amounts in (000s)
Current liabilities:
Short-term borrowings $ 7,253 $ - 7,253
Accounts payable 23,645 20,895 2,750
Accrued liabilities 11,853 9,126 2,727
Merchandise and other customer credits 6,525 5,276 1,249
Income taxes payable 3,995 9,913 (5,918)
Other current liabilities (Operating) 2,339 1,956 383
Shareholders equity:
Common stock 102 86 16
Additional paid-in capital 54,573 50,096 4,477
Retained earnings 45,047 21,530 23,517
Foreign currency translation adjustment (438) (438)
Treasury stock (91) (91) 0
Total shareholders equity 99,193 71,621
$ 162,648 $ 126,669 35,979
C. Mulford, Cash Flow Construction, page: 41
Where,
Using EQI
Once adjusted cash flow and income have been calculated, the
EQI ratio can be computed.
Declines in the EQI ratio will be an indication that earnings are
growing faster than operating cash flow.
Understanding EQI
It is when the relationship of the two net cash margin and net
earnings margin change that one must look more closely to
determine why.
C. Mulford, Cash Flow Construction, page: 47
Stable EQI
Microsoft Corp.
Apple, Inc., Operating Cash Flow, Revenue, Operating Earnings, and Calculation
of EQI, Years Ending 2011 - 2015(millions of dollars)
2011 2012 2013 2014 2015
Obtained from statement of cash flows:
Operating cash flow growth matches growth in revenue and net income. EQI
remains relatively stable, though rising and falling with no discernible pattern.
C. Mulford, Cash Flow Construction, page: 49
Target Corp., Operating Cash Flow, Revenue, Operating Earnings, and EQI, Years
Ending February 2001 - February 2007
(millions of dollars)
2001 2002 2003 2004 2005 2006 2007
Obtained from statement of cash flows:
Adjusted operating cash flowa $2,134 $2,012 $1,590 $3,160 $3,808 $4,451 $4,862
(Increase) in accounts receivable -- (1,193) (2,194) (744) (209) (244) (226)
Obtained from income statement:
Revenue 36,851 39,826 43,917 46,781 46,839 52,620 59,490
Obtained from income statement:
Adjusted operating earningsa $1,264 $1,368 $1,654 $1,841 $1,885 $2,408 $2,787
EQI: 2.36% 1.62% -.15% 2.82% 4.11% 3.88% 3.49%
aNo significant adjustments were noted.
bIncrease in companys credit card receivables was biggest factor explaining year-to-year changes in operating cash
flow.
Note that EQI was 2.36% in the year ended February 3, 2001, which was the year
before it introduced its own credit card. During the year in which its card was
introduced, the year ended February 2, 2002, accounts receivable increased $1,193
million, creating a drag on operating cash flow. As a result, as earnings increased
to $1,368 million that year from $1,264 million in 2001, operating cash flow
declined to $2,012 million from $2,134 million in 2001. EQI declined to 1.62% in
2002 from 2.36% in 2001.
During the year ended February 1, 2003, accounts receivable increased another
$2,194 million. That year, operating cash flow declined even more and EQI
became negative, dropping to -.15%. Clearly the trend was not a promising one.
The increase in credit card receivables slowed to $744 million in the year ended
January 31, 2004. As a result, that year the company generated significantly more
operating cash flow, $3,160 million, than it had in any recent reporting period.
EQI also improved to 2.82%, higher than it was in the year ended February 3,
2001, before the company introduced its own credit card.
In subsequent years, the significant increases in receivables noted earlier did not
continue and EQI stabilized at higher levels to-date, problems have been
averted.
C. Mulford, Cash Flow Construction, page: 50
EQI Steadies
Target Corp. (contd)
Operating Cash Flow, Revenue, Income from Continuing Operations and EQI:
Krispy Kreme Doughnuts, Inc., Years Ending February 1, 2001, 2002, 2003, and
2004 (thousands of dollars)
2001 2002 2003 2004
For Krispy Kreme, the year ended February 1, 2004 was the last one before an
internal investigation and an SEC inquiry were begun into how transactions with
affiliates were handled.
While operating cash flow didn't turn negative, it is clear from the above
presentation that operating cash flow was not growing as fast as income from
continuing operations.
The balance sheet showed a build up of accounts receivable and notes receivable
from affiliates.
C. Mulford, Cash Flow Construction, page: 52
Operating Cash Flow, Operating Income, and Calculation of EQI: Xerox Corp.,
Years Ending December 31, 1994, 1995, 1996, 1997, 1998, and 1999 (thousands
of dollars)
1994 1995 1996 1997 1998 1999
Xerox Corp.
Xerox Corp. has been singled out by the SEC for premature revenue recognition.
Before filing its financial statements with the Commission for the year ended
December 31, 2000, the Company was forced to restate results for 1998 and 1999.
Xerox conceded that, ". . . it had 'misapplied' a range of accepted accounting rules,
including some related to its huge copier-leasing business."
Operating Cash Flow, Operating Income, and Calculation of EQI: Enron Corp.,
Years Ending December 31, 1996, 1997, 1998, 1999, 2000, and 1st 6 months of
2001 (millions of dollars)
1996 1997 1998 1999 2000 6Mo 2001
Beazer Homes USA, Inc., Operating Cash Flow, Revenue, Operating Earnings,
and Calculation of EQI, Years Ending Sept. 2002 2006.
(millions of dollars)
2002 2003 2004 2005 2006
Obtained from statement of cash flows:
Beazer Homes USA, Inc., Operating Cash Flow, Revenue, Operating Earnings,
and Calculation of EQI, Years Ending Sept. 2013 2015 (millions of dollars)
2013 2014 2015
Obtained from statement of cash flows:
Operating Cash Flow, Operating Income, and Calculation of EQI: Deckers, Inc.,
Years Ending December 31, 2007, 2008, 2009, 2010, and 2011
(millions of dollars)
2007 2008 2009 2010 2011
Within 30 days of the companys release of its 2011 results the companys stock price declined
by 33%.
C. Mulford, Cash Flow Construction, page: 58
C. Mulford, Cash Flow Construction, page: 59
Forders, Inc.
Solution Note
Operating cash flow:
Net income $ 29,504
Loss on disposal of investment 1,000
Depreciation expense 7,519
Accounts receivable 3,993
Inventories (10,972)
Current deferred income tax assets (2,954)
Other current assets (219)
Noncurrent deferred income tax assets (1,277)
Accounts payable 276
Income taxes payable 8,373
Accrued expenses payable 6,617
Noncurrent deferred income tax liabilities (1,175)
Accrued warranty liability 1,110
Operating cash flow 41,795
DHTK Corp.
Net income $ 5,790
Depreciation 1,616
Amortization 403
Gain on debt retirement (424)
Dec. in accounts receivable 420
Inc. in inventory (1,069)
Inc. in deferred tax benefit (259)
Inc. in prepaid expenses (139)
Dec. in accounts payable (606)
Inc. in accrued payroll, payroll taxes and benefits 100
Inc. in accrued expenses 303
Dec. in income taxes payable (69)
Inc. in accrued warranty 63
Dec. in deferred revenue (105)
Inc. in deferred tax liability 63
Investing activities:
Financing activities: