Financial Accounting: An Integrated Statements Approach, 2nd Edition

622 Chapter 13 Statement of Cash Flows

Case 13-2

Analysis of statement of cash

flows

Instructions

Prepare a statement of cash flows, using the direct method of presenting cash flows from oper-

ating activities.

FINANCIAL ANALYSIS AND REPORTING CASES

The operating activities section of the statement of cash flows for PepsiCo, Inc., owner of the

Pepsi beverage brand, is shown as follows:

Case 13-1

Interpreting cash flows from

operations

PepsiCo, Inc.

Statement of Cash Flows—Operating Activities (annotated)

For the Year Ended December 28, 2004

(in millions)

Operating activities:

Net income $4,212

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization 1,264

Stock-based compensation expense 368

Impairment and restructuring charges 150

Bottling equity income, net of dividends (297)

Other noncash charges and credits, net (230)

Changes in operating working capital, excluding effects of

acquisitions and dispositions accounts and notes receivable: (130)

Inventories (100)

Prepaid expenses and other current assets (31)

Accounts payable and other current liabilities 216

Income taxes payable (268)

Net change in operating working capital $ (313)

Other $ (100)

Net cash provided by operating activities $5,054

a. Why are impairment and restructuring charges added to the net income in determining

cash flows provided by operating activities?

b. Why is the bottling equity income, net of dividends, subtracted from the net income in

determining cash flows provided by operating activities?

c. What is “stock-based compensation expense,” and why would it be added back to net in-

come in determining cash flows provided by operating activities?

Lee O’Brien is the president and majority shareholder of Fluff N’ Stuff, Inc., a small retail store

chain. Recently, O’Brien submitted a loan application for Fluff N’ Stuff, Inc., to Montvale

National Bank. It called for a $300,000, 7%, 10-year loan to help finance the construction of a

building and the purchase of store equipment, costing a total of $340,000, to enable Fluff N’ Stuff,

Inc., to open a store in Montvale. Land for this purpose was acquired last year. The bank’s

loan officer requested a statement of cash flows in addition to the most recent income statement,

balance sheet, and retained earnings statement that O’Brien had submitted with the loan

application.