348 CHAPTER 9 Financial Statements, Cash Flow, and Taxes
What is the statement of cash flows, and what types of questions does it answer?
Identify and briefly explain the three different categories of activities shown in
the statement of cash flows.
Modifying Accounting Data for Managerial Decisions
Thus far in the chapter we have focused on financial statements as they are presented
in the annual report. However ,these statements are designed more for use by creditors
and tax collectors than for managers and stock analysts. Therefore ,certain modifications
TABLE 9-4 MicroDrive Inc.: Statement of Cash Flows for 2002
(Millions of Dollars)
Cash
Provided or Used
Operating Activities
Net income before preferred dividends $117.5
Adjustments:
Noncash adjustments:
Depreciationa 100.0
Due to changes in working capital:b
Increase in accounts receivable (60.0)
Increase in inventories (200.0)
Increase in accounts payable 30.0
Increase in accruals 10.0
Net cash provided by operating activities ($ 2.5)
Long-Term Investing Activities
Cash used to acquire fixed assetsc ($230.0)
Financing Activities
Sale of short-term investments $ 65.0
Increase in notes payable 50.0
Increase in bonds outstanding 174.0
Payment of preferred and common dividends (61.5)
Net cash provided by financing activities 227.5
Summary
Net change in cash ($ 5.0)
Cash at beginning of year 15.0
Cash at end of year $ 10.0
aDepreciation is a noncash expense that was deducted when calculating net income. It must be added back to
show the correct cash flow from operations.b
An increase in a current asset decreasescash. An increase in a current liability increasescash. For example, inven-
tories increased by $200 million, so that reduced cash by a like amount.c
The net increase in fixed assets is $130 million; however, this net amount is after a deduction for the year’s depre-
ciation expense. Depreciation expense would have to be added back to find the increase in gross fixed assets.
From the company’s income statement, we see that the 2002 depreciation expense is $100 million; thus, expendi-
tures on fixed assets were actually $230 million.
See Ch 09 Tool Kit.xls
for details.
344 Financial Statements, Cash Flow, and Taxes
