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Intermediate Accounting I Statement of Cash Flows Case Spring 2022 Learning Objectives · Contrast and compare the information in the statement of cash flows and income statement. · Identify the three sections of the statement of cash flows. · Understand the operations section of the statement of cash flows. · Explain how operating cash flow line items relate to balance sheet and income statement accounts. · Analyze the changes in balance sheet accounts by inferring transactions. · Construct a complete statement of cash flows using the indirect method. · Interpret the statement of cash flows, comparing key figures to net income. Golden Enterprises, Inc. (the "Company") is a holding company which owns all of the issued and outstanding capital stock of Golden Flake Snack Foods, Inc. Golden Flake Snack Foods, Inc. ("Golden Flake") is a Delaware corporation with its principal place of business and home office located at One Golden Flake Drive, Birmingham, Alabama. Golden Flake has been a premiere producer, marketer, and distributor of snack products in the Southeastern United States since 1923. The Company manufactures and distributes a full line of high quality salted snack items, such as potato chips, tortilla chips, corn chips, fried pork skins, baked and fried cheese curls, onion rings, and puff corn. Golden Flake also sells canned dips, pretzels, peanut butter crackers, cheese crackers, dried meat products, and nuts packaged by other manufacturers using the Golden Flake label. (Source: 2013 Form 10-K) Refer to the financial statements of Golden Enterprises, Inc. Concepts a. What information does the statement of cash flows provide? How is this different from the information contained in the income statement? b. What are the two different methods for preparing the statement of cash flows? Which method does Golden Enterprises use? How do you know? Why do you think most companies prepare their statement of cash flows using the indirect method? c. What are the three sections of the statement of cash flows? d. How do each of the three sections of the statement of cash flows relate to the balance sheet? e. The balance sheet includes an item called "Cash and cash equivalents." What are "cash equivalents"? f. Net income is determined on an accrual basis. Yet, net income is the first item on the statement of cash flows. Explain this apparent inconsistency. Process g. Construct the 2013 statement of cash flows for Golden Enterprises using the indirect method. Recall that the change in cash (ie, the statement of cash flows) is algebraically related to the balance sheet as follows: Δ Cash = Δ Liabilities + Δ Owners' Equity – Δ All Other Assets Thus, if you can "explain" the change in each of the noncash balance sheet accounts (and only those accounts), you will have generated a statement of cash flows. Use a set of T-accounts for the balance sheet accounts (T-accounts are included at the end of the case) or a spreadsheet to help you organize your efforts. For each balance sheet account, consider what transactions and activities explain the change in the account. Classify each transaction and activity as operating, investing, or financing to prepare the statement of cash flows for Golden Enterprises. You can use Golden Enterprises' fiscal 2012 as a guideline. The following items provide additional information to help you prepare the statement of cash flows. All dollar amounts are in thousands. 1. IN fiscal 2013, depreciation expense on property and equipment was $3,538,740. During 2013, the company purchased $4,149,678 of new property, plant, and equipment for cash. The company sold property and equipment for $74,514 in cash. No other property and equipment was acquired or sold in 2013. Activities in the fixed asset accounts affect the statement of cash flows in four ways. Determine each of the four items, i through iv, below. To do this, create two T-accounts, one for (total) property and equipment at cost and another for accumulated depreciation. Use the information from Golden Enterprises' balance sheet and the information above to analyze the activity in both accounts during the year. i. Depreciation expense is included in the operating section of the statement of cash flows. ii. Capital expenditures (ie cash used to purchase new property and equipment) are included in the investing section of the statement of cash flows as a use of cash. iii. Cash proceeds from the sale or disposal of property and equipment are included in the investing section as a source of cash. iv. Gains and losses on sales of fixed assets are included in the operating section of the statement of cash flows. Hint: You can find the gain or loss on Golden Enterprises' income statement. Often, however, that is not the case because the gain or loss is combined with other items in a single line item on the statement. In those cases, to determine the gain or loss on disposal, determine the cost of the disposed property (the credit that balances the gross property and equipment T-account) and the related accumulated depreciation on the disposed property (the debit that balances the accumulated depreciation account). The difference between the cost of the disposed property and the related accumulated depreciation is the net book value of the disposed property. Compare the net book value to the cash proceeds to determine the amount of gain or loss on disposal. You can prove this using figures from Golden Enterprises' financial reports. 2. During fiscal 2013, Golden Enterprises issued $38,361,200 of new debt and spent $38,287,529 to repay debt. These activities affected the "Current portion of long-term debt," "Line of credit outstanding," and "Note payable-bank" accounts. Combine those accounts to perform your analysis. The "Checks outstanding in excess of bank balances" account is also considered a financing account. 3. To simplify your analysis, also combine the following balance sheet accounts: a. Accrued income taxes asset and liability accounts into a single, net liability account b. Deferred income tax asset and liability accounts into a single, net total liability account c. Current and long-term salary continuation accounts into a single total liability account. 4. As in the 2012 statement of cash flows, both "other assets" accounts should be treated as operating assets. 5. Recall that transactions with owners of the firm (for example, share issuances, dividends, and share repurchases) are reported in the statement of changes in stockholders' equity. Analysis h. Depreciation and amortization are added back to net income in the operating section of the statement of cash flows. Does depreciation expense actually generate cash for Golden Enterprises? i. Use the 2013 statement of cash flows you constructed and the statements of income for 2012 and 2013 to evaluate Golden Enterprises' profitability and ability to generate cash. Comment on the nature of the differences between net income and cash from operations in each year. j. Refer to the company's statements of cash flows for 2012 and 2013. Has Golden Enterprises maintained its productive capacity, expanded it, or decreased it over the last three years? Explain. k. In the Management discussion and analysis section of Golden Enterprises' 2013 Form 10-K, the company indicates that it expects to spend approximately $5,000,000 on property, plant, and equipment in fiscal 2014 – a greater than 20% increase in capital expenditures over that in fiscal 2013. Discuss Golden Enterprises' capacity for making the capital expenditures. What are the likely sources of cash to fund the increased level of investment in property and equipment? The T-accounts for all the balance sheet accounts are as follows: Cash and cash equivalents Opening Balance $1,893,816 Operating activities Net Income Investing activities Financing activities Closing Balance $757,111 Accounts receivable, net* Opening Balance $10,566,073 Closing Balance $10,459,706 Inventories Opening Balance $5,156,798 Closing Balance $4,955,813 Prepaid expenses Opening Balance $1,754,874 Closing Balance $1,554,737 Accrued incomes taxes, net (combined) Opening Balance $59,894 $53,475 Closing Balance Property, plant, and equipment, gross Opening Balance $89,285,723 Closing Balance $93,022,443 Accumulated depreciation $62,788,133 Opening Balance $65,927,389 Closing Balance Checks outstanding in excess of bank balances $1,710,417 Opening Balance $1,442,915 Closing Balance Accounts payable $6,025,465 Opening Balance $4,809,066 Closing Balance Other accrued expenses $4,472,079 Opening Balance $5,427,017 Closing Balance Salary continuation plan (current and long-term) $1,279,233 Opening Balance $1,229,459 Closing Balance Notes payable and long-term debt, total^ $7,358,681 Opening Balance $$7,432,352 Closing Balance Deferred income taxes, net (current and long-term) $2,894,123 Opening Balance $2,708,184 Closing Balance Common Stock $9,219,195 Opening Balance $9,219,195 Closing Balance Additional paid-in capital $6,497,954 Opening Balance $6,497,954 Closing Balance Retained earnings $19,607,056 Opening Balance $19,273,214 Closing Balance Treasury shares Opening Balance $10,925,759 Closing Balance $10,932,619 *bad debt expense was $0 and no accounts receivable were written off in fiscal 2013 ^comprised of current portion of long-term debt, line of credit outstanding, and note payable-bank, non-current GOLDEN ENTERPRISES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS As of May 31, 2013 and June 1, 2012 ASSETS CURRENT ASSETS 2013 2012 Cash and cash equivalents $757,111 $1,893,816 Receivables: Trade accounts 10,363,221 10,349,946 Other 166,485 286,127 10,529,706 10,636,073 Less: Allowance for doubtful accounts 70,000 70,000 10,459,706 10,566,073 Inventories: Raw materials 1,872,541 1,693,629 Finished goods 3,083,272 3,463,169 4,955,813 5,156,798 Prepaid expenses 1,554,737 1,754,874 Accrued income taxes - 59,894 Deferred income taxes 596