Financial Accounting: An Integrated Statements Approach, 2nd Edition

As of December 31, 2004, Hershey had total assets of $3.8 billion, of which creditors

had claims of $2.7 billion and stockholders had claims of $1.1 billion. One use of the bal-

ance sheet by creditors is to determine whether the corporation’s assets are sufficient to

ensure that they will be paid their claims. In Hershey’s case, as of December 31, 2004, the

assets of the corporation exceed the creditors’ claims by $1.1 billion. Therefore, the cred-

itors are reasonably assured that their claims will be repaid.

Statement of Cash Flows

The statement of cash flows reports the change in financial condition due to the

changes in cash during a period. During 2004, Hershey’s net cash decreased by $60

million, as shown in Exhibit 7.

Earlier in this chapter, we discussed the three business activities of financing,

investing, and operating. Any changes in cash must be related to one of these three

activities. Thus, the statement of cash flows is organized by reporting the changes in

each of these three activities, as shown in Exhibit 7.

In the statement of cash flows, the net cash flows from operating activities is re-

ported first, because cash flows from operating activities are a primary analysis focus

for most business stakeholders. For example, creditors are interested in determining

whether the company’s operating activities are generating enough positive cash flow

to repay their debts. Likewise, stockholders are interested in the company’s ability to

pay dividends. A business cannot survive in the long term unless it generates positive

cash flows from operating activities. Thus, employees, managers, and other stake-

holders interested in the long-term viability of the business also focus upon the cash

flows from operating activities. During 2004, Hershey’s operations generated a positive

net cash flow of $797 million.

Because of the impact investing activities have on the operations of a business, the

cash flows from investing activities are presented following the cash flows from operat-

ing activities section. Any cash receipts from selling property, plant, and equipment

would be reported in this section. Likewise, any purchases of property, plant, and equip-

ment would be reported as cash payments. Companies that are expanding rapidly, such

18 Chapter 1 The Role of Accounting in Business

Exhibit 7

Statement of Cash

Flows: Hershey Foods

Corporation

Hershey Foods Corporation

Statement of Cash Flows

For the Year Ended December 31, 2004 (in millions)

Net cash flows from operating activities $ 797

Cash flows from investing activities:

Investments in property, plant, and equipment $(363)

Net cash flows used in investing activities $(363)

Cash flows from financing activities:

Cash receipts from financing activities, including debt $ 411

Dividends paid to stockholders (205)

Repurchase of stock (617)

Other, including repayment of debt (83)

Net cash flows used in financing activities $(494)

Net decrease in cash during 2004 $ (60)

Cash as of January 1, 2004 115

Cash as of December 31, 2004 $ 55