-
Chapter 5 Statement of Cash Flows 191
CHAPTER 5 5-1 No. All public companies report it because the
statement of cash
flows is a required statement with a required format. 5-2 A cash
flow statement shows the sources of changes in cash
balances and:
a) aids in predicting future cash flows and evaluating how
management's decisions generate and use of cash;
b) aids in determining a company's ability to pay dividends and
interest and to pay debts when due;
c) aids in understanding and identifying changes in the mix of
productive assets.
5-3 Cash equivalents are highly-liquid, short-term investments
that
can be converted easily to cash with little delay. Examples
include money market funds and treasury bills.
5-4 Operating activities, investing activities, and financing
activities
are the three major types of activities summarized in the
statement of cash flows.
5-5 Major operating activities include:
Collections Payments from customers (for sales) to suppliers
(for inventory) from investees (interest & dividends) to
employees (for wages) to creditors (interest) to government
(taxes)
-
192
5-6 Major investing activities include: a) sales and purchases
of property, b) sales and purchases of securities that are
long-term
investments, c) making and collecting long-term loans . 5-7
Major financing activities include: a) borrowing from (nontrade)
creditors, b) repaying (nontrade) creditors, c) issuing equity
securities, d) repurchasing equity securities, and e) paying
dividends. 5-8 Interest paid or received appears in the operating
activities
section. Some commentators favor showing interest paid elsewhere
since it is associated with financing.
5-9 Only increasing long-term debt increases cash. Both
repurchasing common shares and paying dividends decrease
cash.
5-10 Selling fixed assets for cash and collecting a loan
increase cash.
Purchasing equipment decreases cash. Purchasing fixed assets by
issuing debt does not affect cash, but it should be shown in a
schedule of noncash investing and financing activities that is part
of the statement of cash flows.
5-11 When liabilities increase, the firm has either raised cash
and
promised to pay it back later or it has preserved cash rather
than paying it out to reduce growing accounts payable. So more
liabilities lead to more cash. Likewise, increases in noncash
assets require cash. Either cash is spent to get the asset or an
asset is recorded instead of receiving cash.
5-12 Noncash investing and financing activities generally could
have
been accomplished identically in substance (though not in
form)
-
Chapter 5 Statement of Cash Flows 193
by cash transactions. For example, issuing debt to purchase an
asset could have been accomplished by issuing debt for cash and
then using the cash to purchase the asset. Companies should not be
able to prevent disclosure of such a transaction to readers of the
statement of cash flows simply by using a noncash form of
transaction.
5-13 This transaction should not be shown in the body of the
statement of cash flows because it involves no cash flows.
However, it should be reported in an accompanying schedule. Why?
The transaction could have been accomplished by issuing stock for
cash and then buying the fixed asset, whereby it would be in the
statement of cash flows. Readers of statements of cash flows should
be informed about such transactions.
5-14 Yes. It is important to know of the periodic need to pay
off and
refinance debt. Companies with large short-term debt levels
often find it an inexpensive way to borrow, but when interest rates
rise or a company's financial condition worsens, refinancing may be
both difficult and expensive.
5-15 The direct method and the indirect method are the two
major
ways of computing net cash flow from operating activities. 5-16
The information for the direct-method cash flow statement
comes directly from entries into a companys cash account. 5-17
The required adjustments are to add noncash expenses and
losses, deduct noncash revenues and gains, add decreases in
operating assets and increases in operating liabilities, and deduct
increases in operating assets and decreases in operating
liabilities.
-
194
5-18 Sales revenue is recognized on the accrual basis when it is
earned and realized, not when cash is received. Therefore, cash
collections from customers will not ordinarily equal sales revenue
during any given period. Sometimes cash from customers arrives
before it is earned (creating a liability to perform) or after it
is earned (collection eliminates an account receivable).
5-19 Changes in the inventory and accounts payable accounts
explain the difference between cost of goods sold and cash
payments to suppliers.
5-20 Strictly speaking, net losses, by themselves, do not drain
cash.
A net loss is an excess of expenses over revenues; it is an
income statement item rather than an item on a statement of cash
flows. As an extreme example, equipment may be sold below its book
value and cause a net loss, but cash proceeds resulting from the
transaction would be an addition to cash, not a cash drain.
5-21 Cash + Noncash assets = Liabilities + Paid-in capital +
Retained earnings Cash = Liabilities + Paid-in capital + Retained
earnings Noncash assets 5-22 The erroneous impression is that
depreciation is a source of
cash because it is added to net income to determine cash flow
from operations. Depreciation is an allocation of an assets
original cost to expense that does not entail a current cash
outlay; that is, depreciation is a noncash expense. It is added to
net income when using the indirect method only to offset its
deduction in computing net income.
5-23 The newsletter reinforces the widely held erroneous
impression
that depreciation provides cash. See the solution to 5-22.
-
Chapter 5 Statement of Cash Flows 195
5-24 Under the indirect method of preparation, depreciation is
very prominent in the calculation, although not directly a source
of cash. Depreciation belongs in a supporting schedule when using
the direct method. Depreciation is one of the items that reconciles
net income to net cash flow from operating activities.
5-25 Profitable companies often lack for cash because they
are
growing quickly and must acquire inventory for future sales
while waiting to collect growing receivable balances. New firms in
industries such as computers, electronics, and bio-tech might
experience this.
5-26 Large, non-cash expenses such as depreciation could
cause
this. The airline industry might be a good example.
5-27 I would be concerned about this company. Negative cash flow
from operations and new investing is not uncommon among new, high
growth firms. However, at that stage in the growth pattern the
financing is generally from equity and longer-term debt. The
significant use of short-term debt with covenants that will
restrict further debt issues and other actions of the firm suggests
that the equity and long-term debt markets are not and will not be
open to this client. Unless profitability and positive cash flow
from operations are around the corner, this company could have
serious problems raising additional capital. This may not be a good
investment.
-
196
5-28 It is always hard to know what is in a managers mind.
Microsoft experienced explosive growth. It is bought companies on a
regular basis, but its available cash and liquid investments
continued to grow. It does not make sense to continue to manage low
yielding investments in government bonds and such. Microsoft chose
to distribute this capital to investors as share buybacks and a
very large one-time dividend, with a commitment to continue paying
dividends. Prior to Microsofts decision to pay dividends, many
analysts feared that Microsoft would choose to make even larger and
perhaps ill-advised purchases of other companies.
5-29 Until 2002 Amazon had negative cash flows from operations,
and it used cash for investing activities. The positive cash flow
from operations indicates that Amazon is maturing. In fact, having
cash flow from operations exceeding investment needs (that is,
positive free cash flow) is a sign that Amazon is entering a stage
where growth may be slowing but profitability is increasing.
5-30 This attitude would prevent anyone from ever investing in a
brand new company with a great idea. Since these companies are
often risky, this strategy might be quite appropriate for investors
who were retired and relied on investments for living expenses.
However, for a younger person with more ability to take risk, an
appropriate exposure to young, dynamic growth companies might be
quite appropriate. The characteristics referred to in the question
identify the target investments as young growth companies for the
most part but do not reveal much about other investment decision
variables such as the industry, the age of the firm, the nature of
the product, and so on.
-
Chapter 5 Statement of Cash Flows 197
5-31 (10 min.)
BREMERHAVN SHIPPING COMPANY Statement of Cash Flows from
Financing Activities
For the Year Ended December 31, 20X8 Cash flows from financing
activities: Proceeds from issue of long-term debt 200,000 Payment
to retire long-term debt (160,000) Payment to retire common stock
(35,000) Dividends paid (11,000) Net cash used for financing
activities (6,000) Notice especially that both proceeds from the
new issue and the payment to retire long-term debt are listed.
Presenting only the net amount, 40 of proceeds, is not permitted.
Also, the interest is omitted because it is an operating activity,
not a financing activity. 5-32 (5-10 min.)
FAR-EAST TRADING COMPANY Statement of Cash Flows from Investing
Activities
For the Year 20X5
Purchases of fixed assets $(160,000) Proceeds from the sale of
fixed assets 20,000 Investment in Repulski Company (60,000) Net
cash used for investing activities $(200,000)
-
198
5-33 (5-10 min.)
POULSBO BAY COMPANY Schedule of Noncash Investing and Financing
Activities
Note payable issued for acquisition of fixed assets 191,000
Common stock issued on conversion of preferred shares $340,000
Mortgage assumed on acquisition of warehouse 630,000
5-34 (5 min.) The split between cash and credit sales is
irrelevant for purposes of this problem. Sales $750,000 Less
increase in accounts receivable (30,000) Cash received from
customers $720,000 5-35 (5 min.) Cost of goods sold $500,000 Add
increase in inventory ($150,000 $100,000) 50,000 Deduct increase in
accounts payable ($45,000 $24,000) (21,000) Cash paid to suppliers
$529,000
-
Chapter 5 Statement of Cash Flows 199
5-36 (5-10 min.) Wage and salary expense $195,000 Cash paid to
employees 180,000 Increase in accrued wages and salaries payable $
15,000 Beginning balance, accrued wages and salaries payable $
18,000 Increase in accrued wages and salaries payable 15,000 Ending
balance, accrued wages and salaries payable $ 33,000 5-37 (5-10
min.)
ORION STRATEGY, INC. Statement of Cash Flows from Operating
Activities
For the Year Ended December 31, 20X6 Collections from customers
($470,000 $5,000) $465,000 Cash expenses ($285,000 $35,000) 250,000
Net cash provided by operating activities $215,000
-
200
5-38 (5-10 min.)
ORION STRATEGY, INC. Reconciliation of Net Income to Net Cash
Provided
by Operating Activities For the Year Ended December 31, 20X6
Net income $185,000 Add depreciation, which was deducted in
computing net income but does not affect cash 35,000 Deduct
increase in accounts receivable (5,000) Net cash provided by
operating activities $215,000
-
Chapter 5 Statement of Cash Flows 201
5-39 (10 min.) 1. Sales $880,000 Nondepreciation expenses
[570,000 100,000] (470,000) Depreciation (100,000) Net income
$310,000 Add back depreciation 100,000 Net cash provided by
operating activities $410,000 2. Sales $ 880,000 Nondepreciation
expenses [570,000 100,000] (470,000) Depreciation (300,000) Net
income $ 110,000 Add back depreciation 300,000 Net cash provided by
operating activities $ 410,000 Notice that the additional
depreciation did not affect net cash provided by operating
activities. The direct method clearly shows this phenomenon: Direct
method: Sales for cash $ 880,000 Operating expenses in cash
(470,000) Net cash provided by operating activities $ 410,000
-
202
5-40 (5-10 min.) a. Financing f. Financing b. Financing g.
Operating c. Operating h. Operating d. Investing i. Financing e.
Financing Because net income and depreciation appear in the body of
the statement of cash flows, AT&T must use the indirect method
for reporting cash flows from operating activities.
5-41 (10-15 min.)
ELI LILLY AND COMPANY Statement of Cash Flows from Financing
Activities
For the Year Ended December 31, 2002 (In Millions)
Dividends paid (1,335.8) Purchase of common stock and other
capital transactions (385.2) Stock issuances 64.6 Decrease in
short-term borrowings (18.0) Additions to long-term debt 1,259.6
Repayments of long-term debt (7.2) Net cash used for financing
activities $(422.0)
-
Chapter 5 Statement of Cash Flows 203
5-42 (10-15 min.)
KLM ROYAL DUTCH AIRLINES Statement of Cash Flows from Investing
Activities
For the 2003 Fiscal Year (in millions)
Net capital expenditure on intangible fixed assets (28) Capital
expenditures on aircraft (637) Investments in affiliated companies
(33) Disposals of aircraft 308 Net capital expenditures on other
tangible fixed assets (53) Sales of investments 7 Net cash used for
investing activities (436) 5-43 (10-15 min.) Items 3 and 6 are
completely cash transactions and would be shown on the body of a
statement of cash flows. The others all entail some noncash
investing or financing activity. Schedule of Noncash Investing and
Financing Activities Exchange of assets $ 6,000 Issue 6-month note
to retire long-term debt* $ 30,000 Assumption of mortgage on
building purchased** $100,000 Conversion of debt to common stock $
60,000 * The $20,000 cash payment would be in the body of the
statement of cash flows. ** The $20,000 cash payment would be in
the body of the statement of cash flows.
-
204
5-44 (10-15 min.)
NORTHWEST COMMUNICATIONS Statement of Cash Flows
For Six Months Ended June 30, 2004 (In Millions)
Operating Activities: Receipts from customers $ 9,355 Payments
to suppliers and employees (7,499) Interest paid, net (140) Taxes
Paid (167) Cash provided by operating activities 1,549 Investing
Activities: Capital expenditures for property and equipment (1,710)
Sales of marketable securities 191 Other (134) Cash used for
investing activities (1,653) Financing Activities: Issuance of
long-term debt 135 Retirement of long-term debt (160) Issuance of
common stock for employee stock plans 251 Dividend payments (17)
Purchase of treasury stock (193) Cash provided by financing
activities 16
Net (decrease) increase in cash and cash equivalents (88) Cash
and cash equivalents, beginning balance 200 Cash and cash
equivalents, ending balance $ 112
-
Chapter 5 Statement of Cash Flows 205
5-45 (15-20 min.)
POOLS, INC. Statement of Cash Flows
For the Year Ended December 31, 20X7 (In Thousands)
Cash flows from operating activities: Cash collections from
customers $1,400 Cash payments: To suppliers $(825) To employees
(200) For other expenses (100) For interest ( 11) For income taxes
(35) Cash disbursed for operating activities (1,171) Net cash
provided by operating activities 229 Cash flows from investing
activities: Purchase of plant and facilities (435) Cash flows from
financing activities: Issued long-term debt 110 Paid dividends (41)
Net cash provided by financing activities 69 Net decrease in cash
(137) Cash, December 31, 20X6 176 Cash, December 31, 20X7 $ 39
-
206
5-46 (15-25 min.)
KOBE EXPORTS, INC. Statement of Cash Flows
For the Year Ended December 31, 20X5 (In Millions)
Cash flows from operating activities Cash collections from
customers 2,413 Cash payments: To suppliers (1,653) To employees
(305) For other operating expenses (94) For interest (26) For
income taxes (108) Cash disbursed for operating activities (2,186)
Net cash provided by operating activities 227
Cash flows from investing activities: Purchase of warehouse
(540) Proceeds from sale of equipment 47 Net cash used in investing
activities (493)
Cash flows from financing activities: Issued common stock 28
Retired long-term debt (25) Dividends paid (98) Net cash used in
financing activities (95) Net decrease in cash (361) Cash, January
1, 20X5* 368 Cash, December 31, 20X5 7 *X 361 = 7 X = 368 5-47
(15-25 min.)
-
Chapter 5 Statement of Cash Flows 207
ARROYO MANUFACTURING COMPANY
Statement of Cash Flows For the Year Ended December 31, 20X4
(In Thousands) Cash flows from operating activities Cash
collections from customers ($371 + $15) $ 386 Cash payments: To
suppliers ($209 $5 $5) $(199) To employees (82) For other expenses
(15) For income taxes (8) Cash disbursed for operating activities
(304) Net cash provided by operating activities $ 82 Cash flows
from investing activities: Purchase of machinery $(125) Proceeds
from sale of old machines 5 Net cash used for investing activities
(120) Cash flows from financing activities: New issue of long-term
debt $ 100 Payment of dividends* (10) Net cash provided by
financing activities 90 Net increase in cash $ 52 Balance, cash and
cash equivalents, December 31, 20X3 45 Balance, cash and cash
equivalents, December 31, 20X4 $ 97 *$15 net income dividends = $5
increase in retained earnings
-
208
5-48 (20-25 min.)
1. J. M. SMUCKER COMPANY Statement of Cash Flows
For the Year Ended April 30, 2003 (In Millions)
Cash Flows from operating activities:
Cash received from customers ($1,311 $43) $1,268 Cash paid for
operating expenses ($1,147 + 12 - 56 - 34) (1,069) Cash paid for
other expenses ($9 $12) 3 Taxes paid ($59 $23) (36) $ 166 Cash
flows from investing activities: Additions to property, plant, and
equipment $(49) Business acquired (11) Disposal of property, plant,
and equipment 7 (53) Cash flows from financing activities: Issuance
of common stock $ 7 Dividends paid (34) (27) Increase in cash $
86
2. Operating cash flows substantially exceeded dividend payments
plus Smuckers investing activities. No additional financing was
required. The $7 million of common stock issued was probably part
of executive stock option plans or employee stock purchase
plans.
-
Chapter 5 Statement of Cash Flows 209
5-49 (15-20 min.)
FIRENZE, S.A. Statement of Cash Flows
For the Year Ended December 31, 20X1 (In Millions of Euros)
Cash flows from operating activities: Cash collections from
customers [910 90] 820 Cash payments: To suppliers [540 + 100 220]
(420) For operating expenses (220) For interest (15) For taxes (25)
Cash disbursed for operating activities (680) Net cash provided by
operating activities 140 Cash flows from investing activities:
Purchase of fixed assets (315) Proceeds from sale of fixed assets
100 Net cash used for investing activities (215) Cash flows from
financing activities: New issue of long-term debt 65 Dividends paid
(30) Net cash provided by financing activities 35 Net decrease in
cash (40) Cash balance, December 31, 20X0 60 Cash balance, December
31, 20X1 20
-
210
5-50 (15 min.)
1. CSR LIMITED Statement of Cash Flows For the Fiscal Year
2003
(In Millions) Cash flows from operating activities: Receipts
from customers A$7,572.7 Payments to suppliers and employees
(6,281.3) Dividends and interest received 78.3 Income taxes paid
(197.6) Net cash from operating activities 1,172.1 Cash flows from
investing activities Purchase of property, plant, and equipment
(315.2) Proceeds from sale of property, plant, and equipment 97.7
Other investing activities (897.6) Net cash used in investing
activities (1,115.1) Cash flows from financing activities Proceeds
from issue of shares 42.8 Repurchase of shares (6.7) Net proceeds
from borrowings 666.2 Dividends paid (245.1) Interest paid (111.4)
Net cash from financing activities 345.8 Net increase in cash A$
402.8
2. Interest paid is an operating item in U.S. cash flow
statements.
3. Interest paid is a cost of financing the companys activities.
Like dividends are a return to suppliers of equity capital,
interest is the return to suppliers of debt capital. Therefore, it
is a legitimate item to be included among financing activities.
4. The FASB decided that because interest is an expense in the
income statement it should be included with the other expenses
among the operating activities.
-
Chapter 5 Statement of Cash Flows 211
5-51 (15 min.)
KANSAI ELECTRIC Statement of Cash Flows
Year Ended March 31 (in Billions of Yen)
Cash flows from operating activities: Operating revenues 2,545
Non-operating revenues 109 Operating expenses (1,954) Non-operating
expenses (140) Net cash provided by operating activities 560
Cash flows from investing activities Cost of construction (672)
Net cash used for investing activities (672)
Cash flows from financing activities Bond issue 236 Increase in
loans 1,546 Repayment of bonds (262) Repayments of loans (1,419)
Net cash provided by financing activities 101 Net decrease in cash
(11) Cash balance at beginning of the period 72 Cash balance at end
of the period 61
-
212
5-52 (10-15 min.)
POOLS, INC. Supporting Schedule to Statement of Cash Flows
Reconciliation of Net Income to Net Cash Provided by Operating
Activities
For the Year Ended December 31, 20X7 (In Thousands)
Net income $ 314 Adjustments to reconcile net income to net cash
provided by operating activities: Add: Depreciation, which was
included in computing net income but does not affect cash 45
Deduct: Increase in accounts receivable (100) [1,500 1,400] Deduct:
Increase in inventory (50) [ 850 800] Add: Increase in accounts
payable 25 [ 850 825] Deduct: Decrease in salaries and wages
payable (10) [ 200 190] Add: Increase in income taxes payable 5 [
40 35]
Net cash provided by operating activities $ 229
-
Chapter 5 Statement of Cash Flows 213
5-53 (10-15 min.) Amounts are in millions. Net Earnings $514 Add
expenses not requiring cash: Depreciation $191 Other 164 355 Adjust
for changes in operating current assets and current liabilities:
Decrease in accounts receivable $ 17 Increase in inventories (11)
Increase in prepaid expenses (1) Decrease in accounts payable (84)
Increase in income taxes payable 71 Increase in other accrued
liabilities (54) (62) $807 5-54 (10-15 min.)
SUMITOMO METAL INDUSTRIES, LTD. Statement of Cash Provided by
Operating Activities
For the Year Ended March 31, 2003 (In Billions of Yen)
Net earnings 17.1 Add depreciation and amortization 93.0 Add
other noncash revenues and expenses, net 16.4 Adjust for changes in
operating current assets and current liabilities Add decrease in
receivables 30.6 Add decrease in inventories 30.7 Add increase in
payables 2.8 Less other changes in current assets and current
liabilities (29.5) Net cash provided by operating activities
161.1
-
214
5-55 (10 min.)
TANG COMPANY (In Millions)
1. Income Statement Sales $380 Nondepreciation expenses ($350
$25) $325 Depreciation (Revised) 45 370 Net income $ 10
Reconciliation of net income to net cash provided by operating
activities: Net income $ 10 Add noncash expenses: Depreciation 45
Deduct net increase in noncash operating working capital (17) Net
cash provided by operating activities $ 38 2. An increase in
depreciation does not affect net cash flow from
operating activities. The $20 million increase in depreciation
decreases net income by $20 million and increases the add back by
$20 million. The net effect is zero. Depreciation is added to net
income merely to offset its deduction when computing net income,
not because it provides cash.
-
Chapter 5 Statement of Cash Flows 215
5-56 (10-20 min.)
KOBE EXPORTERS, INC. Supporting Schedule to Statement of Cash
Flows
Reconciliation of Net Income to Net Cash Provided by Operating
Activities For the Year Ended December 31, 20X5
(In Millions) Net income 254 Adjustments to reconcile net income
to net cash provided by operating activities: Add: Depreciation 151
Deduct: Increase in accounts receivable (2,510 2,413) (97) Deduct:
Increase in inventory (56) Add: Increase in accounts payable (1,599
+ 56 1,653) 2 Deduct: Decrease in wages payable (24) Deduct:
Decrease in income taxes payable (108 105) ( 3) Net cash provided
by operating activities 227
-
216
5-57 (10-20 min.)
ARROYO MANUFACTURING COMPANY Statement of Cash Flows
For the Year Ended December 31, 20X4 (In Thousands)
Cash flows from operating activities Net income $ 15 Adjustments
to reconcile net income to net cash provided by operating
activities: Add noncash expenses: Depreciation $ 40 Add decreases
in current assets: Accounts receivable 15 Inventories 5 Add
increases in current liabilities Accounts payable 5 Interest
payable 2 67 Net cash provided by operating activities 82 Cash
flows from investing activities: Purchase of machinery $(125)
Proceeds from sale of old machines 5 Net cash used for investing
activities (120) Cash flows from financing activities: New issue of
long-term debt $ 100 Payment of dividends (10) Net cash provided by
financing activities 90 Net increase in cash 52 Balance, cash and
cash equivalents, December 31, 20X3 45 Balance, cash and cash
equivalents, December 31, 20X4 $ 97
-
Chapter 5 Statement of Cash Flows 217
5-58 (20-30 min.)
SALINAS COMPANY Statement of Cash Flows
For the Year Ended December 31, 20X1 (In Millions)
Cash flows from operating activities: Net income $ 60
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation 40 Increase in receivables (35)
Increase in inventories (44) Increase in current liabilities 75 Net
cash provided by operating activities $ 96 Cash flows from
investing activities: Purchase of fixed assets (240) Cash flows
from financing activities: Issue of long-term debt $150 Dividends
paid (12) Cash provided by financing activities 138 Net decrease in
cash $ (6) Cash balance, December 31, 20X0 21 Cash balance,
December 31, 20X1 $ 15 2. Dear Mr. Salinas:
Severe shortages of cash often accompany rapid corporate growth.
Profitable operations usually produce heavy supplies of cash. But
the insatiable demand for cash to expand receivables, inventories,
and fixed assets may deplete the cash on hand despite profitable
operations. In your case, the substantial increase in the fixed
asset levels was perhaps the dominant factor in consuming cash
generated by operations.
-
218
5-59 (30-40 min.) 1. ROSENBERG COMPANY
Statement of Cash Flows For the Year Ended December 31, 20X4
(In Millions) Cash flows from operating activities: Cash
collections from customers ($275 $14) $261 Cash payments: To
suppliers ($165 + $20 $14) $(171) For general expenses ($51 + $1)
(52) For taxes ($10 $1) (9) Cash disbursed for operating activities
(232) Net cash provided by operating activities 29 Cash flows from
investing activities: Acquisition of plant assets $ (98) Proceeds
from sale of plant assets 6 Net cash used for investing activities
(92) Cash flows from financing activities: Issue long-term debt $
50 Pay cash dividends (2) Net cash provided by financing activities
48 Net decrease in cash (15) Cash balance, December 31, 20X3 20
Cash balance, December 31, 20X4 $ 5
-
Chapter 5 Statement of Cash Flows 219
5-59 (continued) 2.
Reconciliation of Net Income to Net Cash Provided by Operating
Activities
Net income $ 9 Adjustments to reconcile net income to net cash
provided by operating activities: Depreciation 40 Increase in
accounts receivable (14) Increase in inventory (20) Increase in
prepaid general expenses ( 1) Increase in accounts payable for
merchandise 14 Increase in accrued tax payable 1 Net cash provided
by operating activities $ 29 3. Rosenbergs stress may be reduced
but not eliminated. The
statement of cash flows has shown why cash has fallen by $15
million. Operating activities provided $29 million, and financing
activities provided an additional $48 million, a total of $77
million. However, $92 million was needed for the net acquisition of
plant assets.
Severe crunches on cash commonly accompany quick corporate
growth. There may be substantial net income and working capital
provided by operations, but heavy demands for cash to expand
receivables, inventories, and plant assets diminish the cash on
hand despite profitable operations. Hence, most "growth" companies
pay skimpy or no dividends.
-
220
5-60 (10-15 min.) Amounts are in millions of dollars. Retained
Noncash Cash = Liabilities + Earnings Assets
Sales = + 275 (+ 275) Cash collections from customers + 261 = (
261) Cost of goods sold = 165 ( 165) Purchases = + 185 (+ 185)
Payments to suppliers 171 = 171 Payments for general expense 52 =
51 (+ 1) Tax expense = + 10 10 Payments for taxes 9 = 9 Net cash
provided by operating activities (a subtotal) 29 Expenses not
requiring cash: Depreciation = 40 ( 40) Net income (a subtotal) 9
Purchase of plant assets 98 = (+ 98) Proceeds from sale of plant
assets + 6 = ( 6) Long-term debt issued + 50 = + 50 Dividends paid
2 = 2 Net changes 15 = + 65 + 7 (+ 87)
-
Chapter 5 Statement of Cash Flows 221
5-61 (40-60 min.) This problems includes the complication of
gains and losses on asset sales and debt retirement.
ADIRONDAK TOYS, INC. Statement of Cash Flows
For the Year Ended December 31, 20X4 (In Thousands)
Cash flows from operating activities: Cash collections from
customers ($9,739 + $19) $ 9,758 Dividends received 152 $ 9,910
Cash payments: To suppliers and employees $ (8,074) For interest
($144 $15) (129) For taxes (390) Cash disbursed for operating
activities (8,593) Net cash provided by operating activities $
1,317
Cash flows from investing activities: Purchase property, plant
& equipment $ (1,986) Purchase stock in Lake Placid Toy (3,848)
Proceeds from sale of property 500 Net cash used by investing
activities (5,334)
Cash flows from financing activities: Issue common stock $ 3,300
Cash received on exercise of stock options 170 Issue long-term debt
1,906 Retire long-term debt (850) Buy treasury stock (249) Cash
dividends paid (240) Net cash provided by financing activities
4,037 Net increase in cash and cash equivalents $ 20
Note that (h) regarding the money market fund is irrelevant; it
merely rearranges the composition of the total cash holdings.
The non-cash purchase of new equipment in (d) would be shown in
an accompanying schedule. Similarly for transactions (f) and
(j).
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222
5-61 (continued)
Reconciliation of Net Income to Net Cash Provided by Operating
Activities Net income $ 672 Adjustments to reconcile net income to
net cash provided by operating activities: Add: Depreciation and
amortization 615 Add: Loss on sale of fixed assets (500 576) 76
Deduct: Gain on extinguishment of debt (900 850) (50) Deduct:
Increase in inventories (72) Add: Decrease in accounts receivable
19 Add: Increase in accounts and wages payable 7 Add: Increase in
interest payable 15 Add: Increase in taxes payable 35 Net cash
provided by operating activities $1,317
Schedule of Noncash Investment and Financing Activities Issue
note payable for purchase of equipment $ 516 Issue common stock for
conversion of long-term debt $ 960 Issue common stock to acquire
Sanchez Musical Instruments Co. $ 297
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Chapter 5 Statement of Cash Flows 223
5-62 (20 min.)
NORDSTROM, INC. Statement of Cash Flows
Cash flows from Operating Activities For the Year Ended January
31, 2003
(In Millions)
Cash collections from customers $5,917 (a) Other cash
collections 74 Total Collections 5,991 Cash Payments: To suppliers
$4,098 (b) For selling, general and administrative expenses 1,484
(c) For interest 82 For taxes 48 (d) Total cash payments 5,712 Net
cash provided by operating activities $ 279 (a) $5,975 $58 (b)
$3,971 + $117 + $10 (c) $1,814 $288 - $1 $24 $17 (d) $92 $44
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224
5-63 (15-20 min.) Amounts are in millions. 1. Kellogg's free
cash flow each year was:
(In Millions) 2002 2001 2000 Operating cash flow $ 999.9
$1,132.0 $ 880.9 Additions to properties (253.5) (276.5) (230.9)
Free cash flow before dividends 746.4 855.5 650.0 Dividends (412.6)
(409.8) (403.9) Free cash flow after dividends $ 333.8 $ 445.7 $
246.1
2. Kelloggs has plenty of cash flow from operations each year to
pay its capital investment needs and its dividends. Its best free
cash flow was in 2001, and it fell slightly in 2002.
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Chapter 5 Statement of Cash Flows 225
5-64 (20-25 min.) Amounts are in millions of dollars.
The McDonald's Corporation cash flow statement is presented on
the following page with all brackets in place and with the original
values for a, b, and c. From a solution perspective the following
procedural matters may be useful.
1. & 2. Most of the descriptions are obvious because they
use phrases such issuances or repayment. In this instance all have
the same sign as in the prior year. In both investing and
financing, the sign of "other" can only be determined by
calculating once the others are determined. While "other" has the
same sign as in the prior year, this is not reliable. Also, the
sign of net short-term borrowings (repayments) is not obvious.
While the total could be either positive or negative, the caption
for the total is unambiguous, cash used for financing. Only a
negative $606.8 million will give a total of $511.2 million as cash
used for financing.
3. A. = $2,890.1 - $2,466.6 - $511.2 = -$87.7 million (a
decrease). B. = $418.1 million, the ending balance from the prior
year. C. = A + B = $-87.7 million + $418.1 million = $330.4
million.
4. Beginning Balance + net earnings dividends = ending balance.
$18,608.3 million +$893.5 million -$297.4 million =$19,204.4
million
5. McDonalds' cash flow provided by operations has exceeded its
investing needs over the two years. Therefore, there has been no
need for extra financing.
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226
5-64 (continued) Although not required as part of the problem,
we provide here the
complete statement of cash flows for reference:
MCDONALDs CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions) Years ended December 31, 2002 2001 Operating
activities Net income $ 893.5 $ 1,636.6 Adjustments to reconcile to
cash provided by operations
Depreciation and amortization 1,050.8 1,086.3 Changes in
operating working capital items
Accounts receivable 1.6 (104.7) Inventories, prepaid expenses
and other current assets (38.1) (62.9) Accounts payable (11.2) 10.2
Taxes and other liabilities 448.0 270.4
Other 545.5 (147.6) Cash provided by operations 2,890.1
2,688.3
Investing activities Property and equipment expenditures
(2,003.8) (1,906.2) Purchases of restaurant businesses (548.4)
(331.6) Sales of restaurant businesses and property 369.5 375.9
Other (283.9) (206.3)
Cash used for investing activities (2,466.6) (2,068.2) Financing
activities Net short-term borrowings (repayments) (606.8) (248.0)
Long-term financing issuances 1,502.6 1,694.7 Long-term financing
repayments (750.3) (919.4) Treasury stock purchases (670.2)
(1,068.1) Common stock dividends (297.4) (287.7) Other 310.9
204.8
Cash used for financing activities (511.2) (623.7) Cash and
equivalents increase (decrease) (87.7) (3.6) Cash and equivalents
at beginning of year 418.1 421.7 Cash and equivalents at end of
year $ 330.4 $ 418.1
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Chapter 5 Statement of Cash Flows 227
5-65 (20 min.) 1. Brookline has a large and growing cash
balance. Both sales and
income are declining, indicating that Brookline has not
successfully developed products to replace those responsible for
its peak sales in 2000. The company is apparently managing a
declining situation, selling more fixed assets than it is building
or acquiring. In fact, rather than investing in producing assets,
Brookline seems to be putting any extra cash into passive
investments such as the equity securities of other corporations. Of
the $1,050,000 of net income, $1,500,000 ($900,000 + $600,000) was
investment revenue. $2,100,000 was a gain on the sale of fixed
assets, and these were offset by a $1,200,000 loss on the building
fire. The ongoing business was generating a deficit. Without the
two nonrecurring items and the investment revenue, there would have
been negative net income (i.e. a loss) of $1,350,000 (= $1,050,000
$1,500,000 $2,100,000 + $1,200,000). Even after taking account of
the $600,000 of depreciation and amortization, net cash flow from
operations would have been a negative $750,000. Only by reducing
working capital by $375,000 and receiving $900,000 in dividends did
Brookline get a positive $525,000 of cash flow from operating
activities.
Notice that the two largest sources of cash for Brookline are
the
insurance proceeds on the fire and cash from the sale of fixed
assets. Although these items have generated a healthy increase in
cash this year, they cannot be expected to reoccur regularly.
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228
5-65 (continued) 2. Brooklines Statement of Cash Flows follows
generally accepted
accounting principles. However, it appears that the company may
be trying to manage its operations to maintain a positive cash flow
from operations. The intent of the operating activities section of
the statement of cash flows is to highlight items that are likely
to be maintained into the future. It seems that most of the
positive cash flow items for Brookline are items that will not be
maintained in the future.
There do not seem to be any violations of ethical standards
in
Brooklines financial reports. Users of the reports should be
able to interpret them correctly and to see the unfavorable
situation in which Brookline finds itself, despite the overall
increase in cash and the positive cash provided by operating
activities. Nevertheless, if Brookline had used the direct method
instead of the indirect method in its Statement of Cash Flows, its
situation may have been more clearly communicated to users of the
statements.
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Chapter 5 Statement of Cash Flows 229
5-66 (15-20 min.)
An important lesson in learning to understand statements of cash
flow is to recognize operating, investing, and financing
activities. Terminology can differ from company to company. This
exercise will expose students to a variety of items included in
companies cash flow statements. It would be desirable, though
probably unlikely, that at least one company selected by the
students uses the direct method. If so, the amount of learning will
increase.
By listing the items included in operating, investing, and
financing categories by a variety of companies, students will begin
to see the types of items included. By pruning the list to
eliminate duplicates, they will learn to recognize different ways
of expressing the same thing.
Requirement 4 is not necessary, but it will reinforce the group
learning that took place in the first three requirements. It will
also allow students to start to recognize the most common elements
of cash flow statements and also to try to interpret some that are
quite unusual.
5-67 (45-60 min.) Each solution will be unique and will change
each year. This problem focuses on interpretation of the cash flow
statement, especially comparing net cash from operating activities
with net income.
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230
5-68 (30 min. or more)
1. The major reason for the increase in Starbucks net cash
provided by operating activities is the increase in net earnings.
In addition, depreciation and amortization significantly increased.
The increases in operating assets was mainly offset by increases in
operating liabilities, so the net effect was not large.
2. The main use of the $566 million was to support investing
activities. In total Starbucks used $499 million for investing
activities, $357 million of which was used for net additions to
property plant, and equipment.
3. Starbucks certainly generated enough cash to pay cash
dividends in 2003. However, apparently management decided that a
better use of those funds was to use them for internal expansion
both buying property, plant, and equipment and investing in the
securities of other companies, such as the purchase of Seattle
Coffee Company. It is not true that the shareholders got nothing.
Shareholders gain returns in two ways, dividends and stock price
appreciation. As Starbucks grows, its stock price grows, also.
Thus, the shareholders will benefit from increases in the stock
price, even though they do not get any return in the form of
dividends.
5-69 (30-60 min.) NOTE TO INSTRUCTOR. This solution is based on
the web site as it was in late 2004. Be sure to examine the current
web site before assigning this problem, as the information there
may have changed. 1. Nike used the indirect method. We know that
because the statement begins with net income and adjusts for
noncash items included in net income.
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Chapter 5 Statement of Cash Flows 231
5-69 (continued) 2. Management indicated that cash provided by
operations increased from $922 million in 2003 to $1.5 billion in
2004. The two main reasons for the increase were the increased net
income and better control of working capital. By better supply
chain management Nike reduced its accounts receivable and increased
its accounts payable, resulting in the freeing up of additional
cash. 3. Cash provided by operations exceeds net income by almost
$570 million. About half of this is caused by adding back
depreciation to the net income. The other half is primarily a
result of better control of working capital. 4. Nike, like every
company using the indirect method, adds depreciation and
amortization to net income to offset their deduction in computing
net income. Depreciation and amortization are expenses, but they
are not cash outflows. They are correctly subtracted from revenues
in computing net income, but they should not be deducted from cash
receipts in computing cash from operations. Adding both back to net
income just cancels the deductions taken when computing net income.
5. There were three main investing activities that used cash,
purchases of short-term investments, additions to property, plant,
and equipment, and acquisition of a subsidiary (Converse). 6. Nike
used cash for three main financing activities, including just over
$50 million net reductions in long-term debt ($153.8 million 206.6
million = -$52.8 million), repurchases of stock exceeding new
issues by more than $160 million ($419.8 million - $253.6 million =
$166.2 million), and cash dividends paid of nearly $180
million.