Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 1 The Role of Accounting in Business 19

as startup companies, will normally report negative net cash flows from investing activ-

ities. In contrast, companies that are downsizing or selling segments of the business may

report positive net cash flows from investing activities.

As shown in Exhibit 7, Hershey reported negative net cash flows from investing ac-

tivities of $363 million. This negative net cash flow was from the purchase of property,

plant, and equipment. Thus, it appears that Hershey is expanding operations.

Cash flows from financing activities are reported next. Any cash receipts from

issuing debt or stock would be reported in this section as cash receipts. Likewise,

paying debt or dividends would be reported as cash payments. Business stakeholders

can analyze cash flows from financing activities to determine whether a business is

changing its financing policies.

Hershey paid dividends of $205 million and repaid debt of $83 million. Cash of

$411 million was received from financing activities that included additional borrowing

from creditors. Finally, Hershey purchased its own stock at a cost of $617 million. A

company may purchase its own stock if the corporate management believes its stock

is undervalued or for providing stock to employees or managers as part of an incen-

tive (stock option) plan.^5

The statement of cash flows is completed by determining the increase or decrease in

cash flows for the period by adding the net cash flows from operating, investing, and

financing activities. Hershey reported a net decrease in cash of $60 million. This increase

or decrease is added to or subtracted from the cash at the beginning of the period to

determine the cash as of the end of the period. Thus, Hershey began the year with

$115 million in cash and ended the year with $55 million in cash.

So what does the statement of cash flows reveal about Hershey Foods Corporation

during 2004? The statement reveals that Hershey generated over $797 million in cash

flows from its operations while using cash to expand its operations and pay dividends

to stockholders. Overall, Hershey appears to be in a strong operating position to gen-

erate cash and pay its creditors.

Integrated Financial Statements

As we mentioned earlier, financial statements are prepared in the order of the income

statement, retained earnings statement, balance sheet, and statement of cash flows.

Preparing them in this order is important because the financial statements are inte-

grated. Based upon Hershey Foods Corporation’s financial statements in Exhibits 4–7,

this integration is shown in Exhibit 8 as follows:^6

1. The income and retained earnings statements are integrated. The net income or net
   loss appearing on the income statement also appears on the retained earnings state-
   ment as either an addition (net income) to or deduction (net loss) from the begin-
   ning retained earnings. To illustrate, Hershey’s net income of $591 million is also
   reported on the retained earnings statement as an addition to the beginning retained
   earnings.


2. The retained earnings statement and the balance sheet are integrated. The retained
   earnings at the end of the period on the retained earnings statement also appears on
   the balance sheet as a part of stockholders’ equity. To illustrate, Hershey’s retained
   earnings of $3,469 million as of December 31, 2004, is also reported on the balance
   sheet.

5 We will discuss the accounting for a company’s purchase of its own stock in a later chapter.

6 Depending upon the method of preparing cash flows from operating activities, net income may also

appear on the statement of cash flows. This link and the method of preparing the statement of cash flows,

called “the indirect method,” is illustrated in a later chapter. In addition, as we will illustrate in Chapter 2,

cash flows from operating activities may equal net income.

Q.Hershey Foods
Corporation’sbalance
sheet in Exhibit 6 reports
cash of $55 million
and retained earnings of
$3,469 million. In what
other Hershey exhibits do
these numbers also
appear?

A.Cash of $55 million
also appears in
Exhibit 7, Statement of
Cash Flows; retained earn-
ings of $3,469 million
also appears in Exhibit 5,
Retained Earnings
Statement.