Chapter 3 Financial Statements, Cash Flow, and Taxes 65receivables rose by $60 million in 2008, and that use of cash is shown as a nega-
tive on Line e. If Allied had reduced its receivables, this would have showed
up as a positive cash " ow. (Once cash is received for the sale, the accompany-
ing accounts receivable will be eliminated.)f. Increase in accounts payable. Accounts payable represent a loan from suppliers.
Allied bought goods on credit, and its payables increased by $30 million this
year. That is treated as a $30 million increase in cash on Line f. If Allied had
reduced its payables, that would have required, or used, cash. Note that as
Allied grows, it will purchase more inventories. That will give rise to addi-
tional payables, which will reduce the amount of new outside funds required
to! nance inventory growth.
g. Increase in accrued wages and taxes. The same logic applies to accruals as to
accounts payable. Allied’s accruals increased by $10 million this year, which
means that in 2008, it borrowed an additional $10 million from its workers and
tax authorities. So this represents a $10 million cash in" ow.
h. Net cash provided by operating activities. All of the previous items are part of nor-
mal operations—they arise as a result of doing business. When we sum them,
we obtain the net cash " ow from operations. Allied had positive " ows from
net income, depreciation, and increases in payables and accruals; but it used
cash to increase inventories and to carry receivables. The net result was that
operations led to a $2.5 million net out" ow of cash.
i. Long-Term Investing Activities. All activities involving long-term assets are cov-
ered in this section. Allied had only one long-term investment activity—the
acquisition of some! xed assets, as shown on Line j. If Allied had sold some
! xed assets, its accountants would have reported it in this section as a positive
amount (i.e., as a source of cash).
j. Additions to property, plant, and equipment. Allied spent $230 million on! xed assets
during the current year. This is an out" ow; therefore, it is shown in parentheses.
If Allied had sold some of its! xed assets, this would have been a cash in" ow.^9
k. Net cash used in investing activities. Since Allied had only one investment activ-
ity, the total on this line is the same as that on the previous line.
l. Financing Activities. Allied’s! nancing activities are shown in this section.
m. Increase in notes payable. Allied borrowed an additional $50 million from its
bank this year, which was a cash in" ow. When Allied repays the loan, this will
be an out" ow.
n. Increase in bonds (long-term debt). Allied borrowed an additional $170 million
from long-term investors this year, giving them newly issued bonds in
exchange for cash. This is shown as an in" ow. When the bonds are repaid
some years hence, this will be an out" ow.
o. Payment of dividends to stockholders. Dividends are paid in cash, and the $57.5
million that Allied paid out is shown as a negative amount.
p. Net cash provided by " nancing activities. The sum of the three! nancing entries,
which is a positive $162.5 million, is shown here. These funds were used to
help pay for the $230 million of new plant and equipment and to help cover
the de! cit resulting from operations.
q. Summary. This section summarizes the change in cash and cash equivalents
over the year.
(^9) The number on Line j is “gross” investment, or total expenditures. It is also equal to the change in net plant and
equipment (from the balance sheet) plus depreciation as shown on Line c: Gross investment! Net investment #
Depreciation! $130 # $100! $230.