ch03
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ch03

Course: ACCOUNTING BUSI0027, Spring 2009

School: HKU

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Chapter 3 - Solutions Overview: Problem Length {S} {M} {L} 1.{S}a. Problem #s 1, 3 2, 7, 8, 12, 13 4 - 6, 9 - 11, 14, 15 Palomba Pizza Stores Statement of Cash Flows Year Ended December 31, 2000 Cash Flows from Operating Activities: Cash Collections from Customers Cash Payments to Suppliers Cash Payments for Salaries Cash Payments for Interest Net Cash from Operating Activities Cash Flows from Investing...

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3 Chapter - Solutions Overview: Problem Length {S} {M} {L} 1.{S}a. Problem #s 1, 3 2, 7, 8, 12, 13 4 - 6, 9 - 11, 14, 15 Palomba Pizza Stores Statement of Cash Flows Year Ended December 31, 2000 Cash Flows from Operating Activities: Cash Collections from Customers Cash Payments to Suppliers Cash Payments for Salaries Cash Payments for Interest Net Cash from Operating Activities Cash Flows from Investing Activities: Sales of Equipment Purchase of Equipment Purchase of Land Net Cash for Investing Activities Cash Flows from Financing Activities: Retirement of Common Stock Payment of Dividends Net Cash for Financing Activities Net Increase in Cash Cash at Beginning of Year Cash at End of Year $ 250,000 (85,000) (45,000) (10,000) $ 110,000 38,000 (30,000) (14,000) (6,000) (25,000) (35,000) (60,000) 44,000 50,000 $ 94,000 $ b. Cash Flow from Operations (CFO) measures the cash generating ability of operations, in addition to profitability. If used as a measure of performance, CFO is less subject to distortion than net income. Analysts use the CFO as a check on the quality of reported earnings, although it is not a substitute for net income. Companies with high net income and low CFO may be using overly aggressive income recognition techniques. The ability of a firm to generate cash from operations on a consistent basis is one indication of the financial health of the firm. Analysts search for trends in CFO to indicate future 3-1 cash conditions and potential liquidity or solvency problems. Cash Flow from Investing Activities (CFI) reports how the firm is investing its excess cash. The analyst must consider the ability of the firm to continue to grow and CFI is a good indication of the attitude of management in this area. This component of total cash flow includes the capital expenditures made by management to maintain and expand productive capacity. Decreasing CFI may be a forecast of slower future growth. Cash Flow from Financing (CFF) indicates the sources of financing for the firm. For firms that require external sources of financing (either borrowing or equity financing) it communicates management's preferences regarding financial leverage. Debt financing indicates future cash requirements for principal and interest payments. Equity financing will cause future earnings per share dilution. For firms whose operating cash flow exceeds investment needs, CFF indicates whether that excess is used to repay debt, pay (or increase) cash dividends, or repurchase outstanding shares. c. Cash payments for interest should be classified as CFF for purposes of analysis. This classification separates the effect of financial leverage decisions from operating results. It also facilitates the comparison of Palomba with other firms whose financial leverage differs. The change in cash has no analytic significance. The change in cash (and hence, the cash balance at the end of the year) is a product of management decisions regarding financing. For example, the firm can show a large cash balance by drawing on bank lines just prior to year end. d. e. and f. There are a number of definitions of free cash flows. In the text, free cash flow is defined as cash from operations less the amount of capital expenditures required to maintain the firms current productive capacity. This definition requires the exclusion of costs of growth and acquisitions. However, few firms 3-2 provide separate disclosures of expenditures incurred to maintain productive capacity. Capital costs of acquisitions may be obtained from proxy statements and other disclosures of acquisitions (See Chapter 14). In the finance literature, free cash flows available to equity holders are often measured as cash from operations less capital expenditures. Interest paid is a deduction when computing cash from operations as it is paid to creditors. Palombas free cash flow available to equity holders is calculated as follows: Net cash flow from operating activities less net cash for investing activities: $110,000 - $6,000 = $104,000 The investment activities disclosed in the problem do not indicate any acquisitions. Another definition of free cash flows, which focuses on free cash flow available to all providers of capital, would exclude payments for interest ($10,000 in this case) and debt. Thus, Palombas free cash flow available to all providers of capital would be $114,000. 2.{M}a. 1996 Sales Bad debt expense Net receivables Cash collections1 1 1997 $ 140 7 40 $ 123 1998 $150 7 50 $133 1999 $165 8 60 $147 2000 $175 10 75 $150 2001 $195 10 95 $165 $ ----30 $ --- Sales - bad debt expense - increase in net receivables b. 1997 Bad debt expense/sales 5.0% Net receivables/sales 28.6 Cash collections/sales 87.9 c. 1998 4.7% 33.3 88.7 1999 4.9% 36.4 89.1 2000 5.7% 42.8 85.7 2001 5.1% 48.7 84.6 The bad debt provision does not seem to be adequate. From 1997 - 2001 sales increased by approximately 40%, while net receivables more than doubled, indicating that collections have been lagging. The ratios 3-3 calculated in part b also indicate the problem. While bad debt expense has remained fairly constant at 5% of sales over the 5 year period, net receivables as a percentage of sales have increased from 29% to 49%; cash collections relative to sales have declined. Other possible explanations for these data are that stated payment terms have lengthened or that Stengel has allowed customers to delay payment for competitive reasons. 3-4 3.{S}Niagara Company Statement of Cash Flows 2001 Cash collections Cash inputs Cash expenses Cash interest paid Income taxes paid Cash from Operations Purchase of fixed assets Cash Used for Investing Increase in LT debt Decrease in notes payable Dividends paid Cash Used for Financing Net Change in Cash Cash Balance 12/31/00 Cash Balance 12/31/01 1 $ 980 (670) (75) (40) (30) $ 165 (150) (150) 50 (25) (30) (5) $ 10 50 $ 60 [Sales - Accounts Receivable] [COGS + Inventory [Selling & General Expense - Accounts Payable1] [Interest Expense - Interest Payable] [Income Tax Expense - Deferred Tax] [Depreciation Expense + Fixed Assets (net)] [Net Income - Retained earnings] Can also be used to calculate cash inputs, decreasing that outflow to $645 while increasing cash expenses to $100. 3-5 4.{L}a. Sales G Company Income Statement, 2000 ($ thousands) $ 3,841 3,651 15 41 42 92 [receipts from customers + increase in accounts receivable] [payments - increase in inventory + increase in accounts payable] [increase in accumulated depreciation] [payments] [payment + increase in tax payable] [check = change in retained earnings as there are no dividends] cannot be calculated separately from the COGS + operating expenses1 Depreciation Interest Taxes Net income 1 $ Note that these two items information available. b. M Company Cash Receipts and Disbursements, 2000 ($ thousands) $ 1,807 3 62 96 $ 1,968 [Sales - increase in receivables] [Increase in account] [Increase in liability] [Increase in liability] Cash receipts from: Customers Issue of stock Short-term debt Long-term debt Total Cash disbursements: COGS and operating $ 1,843 expenses Taxes Interest Dividends PP&E purchase Total Change in cash 3 51 22 33 $ 1,952 $ 16 [COGS + operating expense + increase in inventory + decrease in accounts payable] [Expense - increase in tax payable] [Expense] [Income + increase in retained earnings] [Change in PP&E] Note: This is not a true receipts and disbursements schedule as it shows certain amounts (e.g., debt) on a net basis rather than gross. Such schedules (and cash flow statements) prepared from published data can only show some amounts net, unless supplementary data are available. 3-6 c. The cash flow statements are presented with the income statement for comparison purposes in answering Part d. M Company: Statement of Cash Flows ($ thousands) 1996 1997 $1,210 1,187 19 19 $ (15) (17) 5 65 -(21) (14) (2) -33 1 1998 $1,327 1,326 16 9 $ (24) (37) 8 -100 (21) -(3) (8) 76 15 1999 $1,587 1,672 21 9 $ (115) (30) 3 153 -(21) (10) --125 (20) 2000 $1,807 1,843 51 3 $ (90) (33) 3 62 96 (22) ---139 16 CFO: From customers Less outlays for: COGS/oper. exp. Interest Taxes CFI: PP&E purchase CFF: Issue of stock Short-term debt Long-term debt Dividends Stock repurchase LT debt repaid ST debt repaid $1,165 1,130 15 23 $ (3) (14) 5 64 -(20) (22) (2) -25 8 $ Change in cash $ $ $ $ M Company: Income Statement ($ thousands) 1996 Sales COGS Operating expense Depreciation Interest Taxes Total Net Income $ 1,220 818 298 9 15 38 $ 1,178 42 1997 $ 1,265 843 320 10 19 33 $ 1,225 40 1998 $ 1,384 931 363 11 16 27 $ 1,348 36 1999 $ 1,655 1,125 434 12 21 26 $ 1,852 37 2000 $ 1,861 1,277 504 14 51 6 $ 1,852 9 3-7 G Company: Statement of Cash Flows ($ thousands) 1996 CFO: From customers Disbursements: COGS/Oper. exp. Interest Taxes CFI: PP&E purchase CFF: Issue of stock Short-term debt Long-term debt Change in cash $1,110 1,214 11 13 $ (128) --10 80 40 $ 130 $ 2 1997 $1,659 1,702 13 15 $ (71) ----52 23 75 4 1998 $2,163 1,702 23 16 $ (93) (20) 5 91 20 116 3 1999 $2,809 2,895 29 29 $ (144) (10) 45 3 125 173 19 2000 $3,679 3,778 41 35 $ (175) --30 60 50 140 35 $ $ $ $ $ $ $ $ G Company--Income Statement 1996 Sales COGS Operating expense Depreciation Interest Taxes Total Net income $ 1,339 1,039 243 10 11 13 $ 1,316 $ 23 1997 $ 1,731 1,334 312 10 13 20 $ 1,689 $ 42 ($ thousands) 1998 $ 2,261 1,743 398 12 23 27 $ 2,203 $ 58 1999 $ 2,939 2,267 524 14 29 31 $ 2,865 $ 74 2000 $ 3,841 } --}3,651 15 41 42 $ 3,749 $ 92 Note: 2000 COGS and operating expense are combined as there is insufficient information to separate them. 3-8 d. Both companies are credit risks. Although both are profitable, their CFO is increasingly negative. If current trends continue they face possible insolvency. However, before rejecting both loans outright, it is important to know whether CFO and income differ because the companies are doing poorly or because they are growing too fast. Both companies increased sales over the 5 year period; Company M by 50%, Company G by more than 300%. Are these sales real (will cash collections materialize)? If they are "growing too fast," it may be advisable to make the loan but also to force the company to curtail its growth until CFO catches up. One way to verify whether the gap is the result of sales to poor credit risks is to check if the growth in receivables is "proportional" to the sales growth. Similar checks can be made for the growth in inventories and payables. In this case, the inventory of M company has doubled from 1996 to 2000 while COGS increased by only 56%. The inventory increase would be one area to investigate further. There is a significant difference in the investment pattern of the two companies. Company M has made purchases of PPE each year, while Company G has made little net investment in PPE over the period. Yet Company G has grown much faster. Does this reflect the nature of the business (Company G is much less capital intensive) or has Company G used off balance sheet financing techniques? The cash from financing patterns of the two companies also differ. Both tripled their total debt over the period and increased the ratio of total debt to equity. Given Company M's slower growth (in sales and equity), its debt burden has grown much more rapidly. Despite this, Company M has continued to pay dividends and repurchase stock. Company G has not paid dividends and has issued new equity. These two factors account for its larger increase in equity from 1996 to 2000. Based only on the financial data provided, G looks like the better credit risk. Its sales and income are growing rapidly, while M's income is stable to declining on modestly growing sales. Unless further investigation changes the insights discussed here, you 3-9 should prefer to lend to Company G. 3-10 5.{L}a. (i) Statement of Cash Flows - Indirect Method Cash from operations: Net income $1,080 Add noncash expense: depreciation 600 Add/Subtract changes in working capital: Accounts receivable (150) Inventory (200) Accruals 80 Accounts payable 120 (150) $1,530 Cash from investing: Capital expenditures 1,150 Cash from financing: Short term borrowing Long-term repayment Dividends 550 (398) (432) $(280) $ 100 Method) Cash Flow Statement Cash Effect $1,080 600 (150) (200) 80 120 (600) (550) $(1,150) $ 2,000 1,602 (398) 550 550 Net change in cash Worksheet for (Indirect Net income Depreciation Accounts receivable Inventory Accruals Accounts payable Income Balance Sheet Statement 12/31/00 12/31/01 Change $1,080 600 $1,500 $1,650 $150 2,000 800 1,200 6,500 5,500 2,200 880 1,320 7,050 6,050 200 80 120 550 550 Depreciation (600) Net fixed assets Capital expenditures Note payable Short-term borrowing Long-term debt Long-term debt repayment Net income Retained earnings Dividends paid (1,080) (398) $ (398) (1,080) 648 $ (432) 500 1,148 648 3-11 _________ 0 ______ $ 100 The worksheet to create the cash flow statement is presented above. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. As a last check, the net income and the add-backs of non-cash items are balanced and closed to their respective accounts (PP&E and retained earnings) providing the amounts of capital expenditures and dividends. a. (ii) Statement of Cash Flows - Direct Method Cash from Operations: Cash collections $9,850 Cash payments for merchandise (6,080) Cash paid for SG&A (920) Cash paid for interest (600) Cash paid for taxes (720) $1,530 Cash for Investing Activities: Capital expenditures (1,150) Cash for Financing Activities: Short-term borrowing Long-term debt repayment Dividends Net Change in Cash 550 ( 398) ( 432) $( 280) $ 100 The worksheet to create the cash flow statement is presented below. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. Furthermore the operating account changes are matched to their corresponding income statement item. As a last check, the net income is balanced and closed to retained earnings providing the amount of dividends. Note that there is no difference between the indirect and direct methods in the cash flow statement and in the worksheet for cash for investing and financing activities, 3-12 Worksheet for (Direct Method) Cash Flow Statement Income Balance Sheet Cash Statement 12/31/00 12/31/01 Change Effect Sales $10,000 $10,000 Accounts receivable $ 1,500 $ 1,650 $ 150 (150) Cash Collections $ 9,850 COGS (6,000) Inventory Accounts payable Cash Paid for Merchandise SG&A expense Accruals Cash Paid for SG&A (1,000) 800 880 2,000 1,200 2,200 1,320 (6,000) 200 (200) 120 120 $(6,080) (1,000) 80 80 $ (920) $ $ 6,500 5,500 2,000 (1,080) 500 ___ $ ___ 0 1,148 648 7,050 6,050 1,602 550 550 $ (398) $ (600) (600) (720) (720) Interest expense (600) Cash Paid for Interest Taxes Cash Paid for Taxes (720) Depreciation (600) Net fixed assets Capital Expenditures Note payable Short-term Borrowing Long-term debt Long-term Debt Repaid Net income Retained earnings Dividends (600) (550) $(1,150) 550 550 (398) (398) (1,080) 648 $ (432) _______ $ 100 3-13 6.{L}a. Exhibit 3P-3 does not provide the (changes in the) individual components that make up the changes in working capital. As such, to create the direct method cash flow statement, we must obtain the information directly from the balance sheet. This procedure does not necessarily yield the same cash flow components using the direct method as those provided by the company in its indirect method calculations. Differences may arise when 1. there are acquisitions/divestments 2. there are foreign exchange adjustments 3. the firm aggregates or classifies investing accruals together with operating ones. In this case, the differences are minimal as indicated below. (The calculations required for the direct method cash flow statement are presented in Exhibit 3S-1 along with the assumptions used to generate the statement) Direct Method Cash Flow Statement (Exhibit 3S-1) Cash collections Cash for suppliers Cash expenses Interest paid Tax paid CASH FROM OPERATIONS CASH FROM INVESTMENTS Indirect Method (Exhibit 3P-3) Difference $348,627 (246,100) (94,791) (5,303) (2,127) $ 4,560 (4,251 ) 215 $ 524 $4,398 (4,089) 215 $ 524 $ 162 (162) ----- CASH FROM FINANCING CHANGE IN CASH 3-14 Exhibit 3S-1: Direct Method Statement of Cash Flows Income Balance Balance Statement Sheet Sheet 2001 12/31/00 6/30/2001 $342,215 91,636 85,224 (238,799) 163,206 84,734 (91,795) 1,426 55,566 17,679 2,265 (5,128) 175 (831) 4,116 1,130 18,096 2,889 2,383 18,574 (1,227) 1,253 478 $ 0 (175) $ 1,843 56,630 16,299 2,130 417 1,064 (1,380) (135) 158,451 72,678 (4,755) (12,056) Change Cash Effect $ 342,215 (6,412) 6,412 $ 348,627 (238,799) 4,755 (12,056) $(246,100) (91,795) (417) (1,064) (1,380) (135) $ (94,791) (5,128) (175) (5,303) (831) 1,227 1,253 478 2,127 4,560 91,108 9,714 971 90,966 9,591 1,187 (142) (123) 216 $ 3,425 165,799 4,664 (4,732) 142 123 216 (4,251) Sales Accounts receivable Cash collections Cost of goods sold Inventories Accounts payable Cash inputs Operating expenses Other current assets Prepaid expenses & other assets Accrued expenses* Postretirement benefit obligation Cash expenses Interest expense Interest payable* Interest paid Tax expense Income tax receivable Income tax payable Deferred income taxes Tax paid CASH FLOW FROM OPERATIONS Depreciation expense (4,732) Fixed assets Investments in joint ventures Minority interest CASH FLOW FROM INVESTMENTS Current portion of long-term debt 3,425 Long-term debt 161,135 Dividends paid** Other - change in stockholders' equity CASH FLOW FROM FINANCING Net Income (check) 930 Net change in cash 0 4,664 (4,461) 12 $ 215 $ 524 * Assumed change in interest payable to conform to interest paid. ** From the indirect method 3-15 b. 1996 1997 1998 $34,915 $ 5,165 $(23,528) (38,007) (42,977) (46,767) $(3,092) $(37,812) $(70,295) 4,230 38,782 70,474 1999 2000 $73,597 $(18,606) (13,500) (9,017) $60,097 $(27,623) (60,473) 27,124 1st 6 Months 2001 Totals $4,560 $ 76,103 (4,251) (154,519) $ 309 $(78,416) 215 80,352 CFO CFI CFF As noted in Box 3-2, from 1996 to 2000, the company generated free cash flow (CFO less net capital expenditures) of $1.5 million, during the first six months the A. M. Castle added another $309 thousand. However, Box 3-2 also showed that over the five-year period, Castle paid nearly $50 million in dividends and borrowed nearly $130 million to finance its investments and acquisitions. This trend continued in the first six months of 2001 during which the firm borrowed an additional $4.664 million to help pay its dividends and meet capital expenditure needs. Cash generated from operations from 1996 through the end of the first 6 months of 2001 was $76 million but the company spent $154 million to replace productive capacity and for investments and acquisitions. When free cash flows is calculated on this basis (i.e. CFO CFI) there is a shortfall of $78 million. This shortfall as well as dividend payments were financed by borrowing over the same period. The inability to meet its capital and dividend needs from operations clearly indicated that either the dividend would have to be reduced or the company would not be able to remain competitive and/or grow as needed. 3-16 7.{M}a. The Swedish GAAP cash flow statements (CFS) begin with pretax and pre-financial items whereas the U.S. GAAP CFS show adjustments to net income. The net financial items aggregate interest costs and interest income from various sources (including dividends and interest from associated companies and other interest income) . Swedish GAAP CFS aggregate all changes in working capital; U.S. GAAP CFS provide detailed disclosure of the operating changes in components of working capital; nonoperating changes are reported as components of investing activities. Swedish GAAP combines cash and cash equivalents, financial receivables (primarily receivables from associated companies) and financial liabilities (current and long-term debt) in a measure called net financial assets or liabilities. SFAS 95 shows the change in cash and cash equivalents with changes in financial receivables reported as components of CFO and CFI. Changes in current and long-term debt are reported in cash from financing activities. The cash flow statement is shown on page 16. Disadvantages: (1)Aggregation of all changes in operating or working capital accounts combines cash consequences of operating and investing activities. As noted in the chapter, investing activities tend to distort cash flow from operations. (2)The use of net financial items tends to obscures operating, investing, and financing activities. Although disclosure is available to facilitate its calculation, no separate disclosure of actual cash outflow for interest (financing) costs is provided. (3)The inclusion of financial liabilities (borrowing and repayment) and financial receivables in liquid funds distorts cash flows from both investing and financing activities. This approach also hampers the analysis of free cash flows discussed in the chapter. It is also unclear what basis was used by the company to allocate a portion of the financial receivables to operating activities and the remainder to the net financial position category. b. c. 3-17 [Part c is continued on page 17] 3-18 b. Amounts in millions of Swedish Kronor Swedish GAAP Years Ending December 31 1999 Operating profit 2,615 Noncash items 1,551 Change in working capital (3) Net financial items (206) Paid tax (122) Cash flow before capital expenditure 3,835 Capital expenditure (1,988) Change in financial receivables Effects from divested activities 3,258 Cash flow before dividend 5,105 U.S. GAAP 1998 2,475 1,388 169 (137) 253 4,148 (2,557) 0 1,591 46 (800) 0 (111) 726 1,241 0 (4,384) (3,143) 1,636 (463) 68 Net income 1999 1998 2,287 2,591 1,551 1,388 (3) 169 (137) 0 253 3,835 4,148 Operating activities (1,988) (2,557) (3,395) 3,258 0 (2,125 (2,557 Investing activities ) ) 0 (889) (3,110) 2,521 Financing activities (1,478) Exchange rate effects (17) Change in cash and marketable securities 215 46 (800) 0 0 (754) (111) 726 Issue of warrants and convertible loan 0 Dividend paid: Ordinary (889) Extra (3,110) Change in financial liabilities Currency effects Change in net financial liability Closing liquid funds Financial receivables Financial liabilities Net financial liability Opening liquid funds Change in liquid funds Currency effects (17) 1,089 1,456 3,395 (6,905) (2,054) 1,241 235 (20) Cash and marketable securities: Beginning of period 1,241 1,636 3-19 Closing liquid funds 1,456 1,241 End of period 1,456 1,241 3-20 7. c. (continued from page 15) Advantages: (1)The separate display of pre-interest and pre-tax cash flows permits a comparison across companies with different capital structures and tax regimes. (2)Detailed disclosure of investment cash flows (acquisition and other) may facilitate analysis of free cash flows. 8.{M}a. Differences between U.S. and IAS GAAP (see text page 98): IAS GAAP is permissive regarding the classification of interest and dividends received, interest paid, and dividends paid: these cash flows may be reported either as components of CFO or CFI (interest and dividends received) and CFF (interest and dividends paid). Roche classifies interest and dividends received as CFI and interest and dividends paid as CFF. Bank overdrafts may be reported as components of cash and cash equivalents in IAS GAAP; the change in bank overdrafts would not be reported as part of the statement of cash flows. U.S. GAAP requires their classification as liabilities and therefore, as components of financing cash flows. Roche footnote 24 indicates that overdrafts are reported as shortterm debt but is unclear as to how changes are reported in the cash flow statement. Companies using IAS GAAP and the direct method are not required to report the reconciliation from net income to CFO. Cash flow statement on page 18. Note that conversion to SFAS 95 results in only a small difference in CFO as the classification differences largely balance. However both CFF and (especially) CFI are quite different (both level and trend). The major difference is that the large 2000 investment in marketable securities is shown as a CFI outflow under IAS 7 but an increase in cash and marketable securities under SFAS 95 assuming that the marketable securities would be considered cash equivalents under US GAAP. Roche footnote 19 contains general information about its marketable securities, 3-21 b. but not enough detail to determine which investments would be considered cash equivalents. 3-22 b. Roche cash flow statement: IAS and US GAAP 1999 Amounts in CHF Millions IAS 7 SFAS 95 Operating profit* 6,421 6,421 Depreciation and amortization 2,453 2,453 EBITDA 8,874 N.R. Genentech transactions (1,550) (1,550) Other non-cash transactions 619 619 Other (3,598) (3,598) Interest paid (686) Interest and dividends received 459 Increase in working capital (2,618) (2,618) Cash from operations 1,727 1,500 Financing transactions Interest and dividends paid 541 (1,436) Dividends paid Cash from financing activities (895) (906) 459 (420) (867) 103 68 488 541 (750) (209) (906) (906) 103 IAS 7 7,131 2,848 9,979 (3,791) (90) (2,549) 2000 SFAS 95 7,131 2,848 N.R. (3,791) (90) (2,549) (902) 743 367 367 3,916 3,757 (801) (835) (1,636) 1,921 1,921 (36) 4,006 (801) (1,737) (2,538) 1,921 743 (3,496) (832) (36) 510 Capital expenditures, investments and divestitures Interest and dividends received Change in marketable securities Cash from investing activities Net effect of currency translation on cash Increase (decrease) in cash Increase (decrease) in cash and mkt. secs. Note: Row headings that are right justified apply to SFAS 96 amounts. *Actually funds from operations N.R. Not required by US GAAP, but sometimes disclosed 3-23 c. Advantage: IAS recommends separate disclosure of cash outflows for maintenance expenditures and capital expenditures for growth; when available that can be a significant benefit. Disadvantages: (1) Available alternatives for the treatment of interest and dividends received, interest paid, and dividends paid (see answer to part a) may distort CFO, CFI, and CFF and hamper comparisons with companies using US GAAP or (for companies using IAS GAAP) choosing different alternatives. (2) For companies using the direct method, when the reconciliation from net income to CFO is not reported it is impossible to determined whether changes in operating assets and liabilities (e.g. inventory) are due to operating or other factors. 3-24 9.{L}The cash flow statement shows a steady deterioration in CFO; albeit CFO remains positive. Income (before extraordinary items) on the other hand increases steadily at approximately 8%-10% per year. To explain the discrepancy between the pattern of income and CFO, we first compute the direct method cash flow statement and then compare the cash flow components with their income statement counterparts. The (abbreviated) cash flow method is presented below: statement under the direct Years Ended December 31 1992 1993 1994 Cash from operating activities: Collections from customers $2,119,563 $2,420,961 $ 2,744,159 Payments for merchandise (1,502,414) (1,742,149) (2,064,815) Payments for SG&A (453,449) (523,474) (601,575) Interest paid (37,883) (33,367) (33,948) Taxes paid (12,414) (22,989) (8,408) Other (plug) (13,263) (247) (4,619) $ 100,140 $ 98,735 $ 30,794 Cash for investing activities: Capital expenditures Acquisition of leaseholds $ Cash for financing activities: Long-term borrowings Revolving credit borrowings Proceeds from sale of stock, options and warrants $ Net change in cash $ (48,878) (30,602) (85,480) $ (3,276) 1,995 (1,281) $ 13,379 (110,534) (21,894) (132,428) $ (23,831) 54,460 30,629 $ (3,064) $ $ (90,009) (8,025) (98,034) (19,432) 70,243 1,050 51,861 (15,379) The required calculations for the operating items are presented in Exhibit 3S-2 on page 21. The last item other is the plug amount used to arrive at the CFO presented in the indirect cash flow statement (Exhibit 3P-4). 3-25 Exhibit 3S-2 Worksheet for Operating Items for Direct Method SoCF Sales Change in receivables Cash Collections 1992 $ 2,127,684 (8,121) $ 2,119,563 1993 2,414,124 6,837 2,420,961 1994 $ 2,748,634 (4,475) $ 2,744,159 COGS (1,527,731) (1,742,276) (1,975,332) Change in inventory (28,401) (60,893) (82,863) Change in accounts payable 53,718 61,020 (6,620) Payments to Suppliers $(1,502,414) $(1,742,149) $(2,064,815) SG&A expense Change in prepaid expenses Change in accrued wages Payments for SG&A $ Interest expense Amortization of debt issuance costs Interest paid Tax expense Change in taxes payable Deferred taxes Taxes paid (458,804) 1,317 4,038 (453,449) $ (39,934) 2,051 $ (37,883) $ (25,507) 9,003 4,090 (12,414) $ (520,685) (2,137) (652) (523,474) $ (34,904) 1,537 (33,367) $ (26,152) 2,662 501 (22,989) $ (605,538) (3,358) 7,321 (601,575) 1,000 (34,948) (33,948) (27,569) 17,567 1,594 (8,408) $ 3-26 The comparison of the cash flow and income statement components is presented below: 1992 Sales Cash collections Collections/Sales COGS Payments to suppliers Payments/COGS SG&A expense Payments for SG&A Payments/SG&A 2,127,684 2,119,563 99.61% 1993 2,414,124 2,420,961 100.28% 1994 2,748,634 2,744,159 99.84% %change 1992-93 13.5% 14.2% %change 1993-94 13.9% 13.3% %change 1992-94 29.2% 29.5% (1,527,731) (1,742,276) (1,975,332) (1,502,414) (1,742,149) (2,064,815) 98.34% (458,804) (453,449) 98.83% 99.99% (520,685) (523,474) 100.54% 104.53% (605,538) (601,575) 99.35% 14.0% 16.0% 13.4% 18.5% 29.3% 37.4% 13.5% 15.4% 16.3% 14.9% 32.0% 32.7% Credit and collections do not seem to be responsible for the deterioration in CFO. A comparison of cash collections with sales indicates that collections increased at a slightly faster pace than sales. The collections/sales ratio increased from 99.61% in 1992 to 99.84% in 1994. Inventory, however, is another matter. Payments for inventory increased by 37% whereas COGS increased by only 29%. This is indicative of inventory being bought and paid for but not being sold. The proportion of payments to COGS increased accordingly from 98.3% to 104.5% in two years. This 6% increase translates (based on COGS of close to $2,000,000) to an increased annual cash requirement of $120,000. Thus, the first cause of Radlocs problems seems to be inventories. Its income may be overstated as inventory may have to be written down if it cannot be sold. Even if inventory is eventually sold and the purchases now being made now are able to satisfy future growth, the firm may still face liquidity problems as it requires cash to purchase (and carry) the new inventory. However, as CFO is still positive the firm may still be a good candidate for credit. 3-27 Further insights as to the impact of growth can be seen if we compare free cash flow (CFO - CFI) with income and CFO. Earnings before extraordinary CFO Free Cash Flow 150,000 100,000 50,000 1992 (50,000) (100,000) 1993 1994 Earnings before extraordinary items CFO Free Cash Flow s 1992 $37,262 100,140 14,660 1993 $41,378 98,735 (33,693) 1994 $44,359 30,794 (67,240) Although income rises, CFO and free cash flow fall. CFO exceeds income in 1992 and 1993 as the noncash depreciation addback increases CFO relative to income. By 1994, however, CFO, (although positive) falls below income. This indicates that the firm may have problems in covering the replacement of current productive capacity. Free cash flow is negative in 1993 and 1994 and barely positive in 1992. This indicates that the firms growth (in addition to inventory) requires cash that Radloc cannot supply internally. Where did the cash come from? In 1993, it met its cash requirements by issuing stock; in 1994 the firms short term debt increased considerably as it drew down its revolving credit lines. Thus, the loan should not be granted as the firm seems to be facing an increasing liquidity crisis.. Note: Radloc is an anagram for Caldor, a chain of discount stores. The data in Exhibit 3P-4 were taken from Caldors published financial statements. Caldor filed for Chapter 11 bankruptcy soon after the 1994 statements were published. 3-28 10.{L}a. This part of the question requires an understanding of SFAS 95, which governs the preparation of the Statement of Cash Flows. SFAS 95 permits use of either the direct or indirect method. As an initial step under either method, the effect of the Kraft acquisition must be removed as follows: Balance Sheet Changes ($ in millions} As Reported 1987 As Reported 1988 $ 2,222 5,384 8,648 15,071 1,259 1,777 3,848 17,122 Reported Change 1987-88 $ 157 1,230 2,066 11,019 (181) 986 1,571 10,829 Less Kraft $ 758 1,232 1,740 10,361 700 578 530 900 Adjusted Change $ (601) (2) 326 658 (881) 408 1,041 9,929 Receivables Inventory PPE Goodwill ST debt A/C payable Accrued liabilities LT debt $ 2,065 4,154 6,582 4,052 1,440 791 2,277 6,293 The transactional analysis worksheet and statement of cash flows are shown on pages 25 and 26 respectively. b. The simplest calculation would be operating cash flow less capital expenditures: $5,205 - $980 = $4,225 million. But many variations are possible. The more important part of the question is the connection between free cash flow and future earnings and financial condition. Possible uses of free cash flow include: 1) Repayment of debt resulting in lower interest cost and higher earnings. This also reduces debt ratios and improves interest coverage, possibly leading to higher debt ratings. Repurchase of equity may raise earnings per share and (if repurchased below stated book value or real value per share) increase these. Acquisitions (such as Kraft) that may provide future growth, better diversification, lower risk, etc. Expenditures to fund internal growth through capital spending, research and development, new 3-29 2) 3) 4) product costs, etc. 3-30 Transactional Analysis Worksheet Revenues Decrease in receivables Cash collections Cost of goods sold Decrease in inventory Increase in accounts payable Cash inputs Selling & admin. expense Increase in accrued liabilities Cash expenses Income tax expense Increase in income taxes payable Decrease in deferred income taxes Income taxes paid Interest expense Cash flow--operating activities Depreciation expense Increase in net PPE Cash invested in PPE Goodwill amortization Increase in goodwill Goodwill purchased Decrease in investments Acquisition of Kraft Cash flow--investing activities Dividends declared Increase in dividends payable Dividends paid Decrease in stockholders' equity (repurchase)* Net change in short-term debt Net change in long-term debt Cash flow--financing activities Increase in cash and equivalents * ($ Millions) $31,742 601 $ 32,343 (12,156) 2 408 (11,746) (14,410) 1,041 (13,369) (1,390) 362 (325) (1,353) (670) $ 5,205 $ (654) (326) $ (125) (658) (783) 405 (11,383) $(12,741) $ (941) 47 $ (894) (540) (881) 9,929 7,614 $ 78 (980) $ The net issuance or repurchase of equity is computed by reconciling the stockholders' equity account: Reconciliation of Stockholders' Equity 12/31/87 balance $ 6,823 1988 net income 2,337 Dividends declared (941) Total $ 8,219 12/31/88 balance (7,679) Decrease in stockholders' equity (repurchase) $ 540 3-31 Philip Morris Companies, Inc. Worksheet for Statement of Cash Flows Indirect Method Year Ended December 31, 1988 ($ Millions) Cash flows from operating activities: Net income Adjustments to cash basis: Depreciation expense Amortization of goodwill Decrease in accounts receivable Decrease in inventory Decrease in deferred taxes Increase in accounts payable Increase in accrued liabilities Increase in income taxes payable Net cash flow from operating activities Cash flows from investing activities: Increase in PPE (before depreciation) Increase in goodwill (before amort.) Decrease in investments Acquisition of Kraft Net cash used by investing activities Cash flows from financing activities: Decrease in short-term debt Increase in long-term debt Decrease in stockholders' equity (repurchase) Dividends declared Increase in dividends payable Net cash provided by financing activities Net increase in cash Supplementary disclosure of cash flow information: Interest paid during year Income taxes paid during year Schedule of noncash investing and financing activities: $ 2,337 654 125 601 2 (325) 408 1,041 362 $ $ (980) (783) 405 (11,383) (12,741) $ (881) 9,929 (540) (941) 47 $ 5,205 7,614 78 670 1,353 $------- 3-32 c. If the acquired inventories and receivables are sold the proceeds will be reported as cash flow from operations (CFO). As their acquisition was reported as cash used for investment, CFO will be inflated. This will occur if Kraft reduces its required level of inventories and receivables because of operating changes (such as changes in product lines or credit terms) or the use of financing techniques that remove these assets from the balance sheet. The first step is to match the items from the indirect cash flow statement with their corresponding items on the income statement as below.1 In Direct Method Statement offset to: Depreciation expense Tax expense Restructuring expense Cost of products sold Selling, research etc* Other income Other income Other income Sales Cost of products sold Selling, research etc Cost of products sold Taxes paid 11.{L}a. Indirect Method Statement Net income $ 111 Adjustments to income Depreciation 280 Deferred tax 32 Restructuring (see Note A) 79 In COGS 1.7 Pension credit (79) Asset sale gains (18) Currency (gains) losses 3.6 Other 3.8 Working capital changes Receivables (41.1) Inventories 24.6 Prepaid expenses etc. (1.1) Accounts payable 24.8 Income tax (9.7) Cash from operations $ 411.6 * It is possible the pension credit may also be included in cost of products sold. 1 As a result of this matching, depreciation expense and restructuring expense offset and are eliminated from the direct method cash flow statement. 3-33 Westvaco Direct Method Cash Flow Statement Sales Change in accounts receivable Cash collections Cost of products sold Change in inventories Change in accounts payable and other accrued expenses Inventory write down (restructuring) Cash paid for inputs Selling, research and administrative expenses Change in prepaid expenses Pension credit Adjustment for interest and taxes* Cash expenses Interest expense Adjustment to interest paid (Note H)* Interest paid Tax expense Deferred tax Change in income tax payable Adjustment to tax paid (Note H)* Income taxes paid Other** Cash from operations $ 2,802 (41) $ 2,761 (1,970) 25 25 2 $(1,918) (231) (1) (79) (14) (325) (123) 11 (112) (37) 32 (10) 3 (12) 18 412 $ $ $ $ * In Note H, Westvaco provides (as required by SFAS 95) the amount of interest and income tax paid. Our calculations must be adjusted to reconcile with these amounts. We have applied the adjustment to cash expenses, although it is possible that it should be applied to cash paid for inputs ** Other income of $29 from income statement less (from indirect cash flow statement) gains on asset sales $18, plus currency losses of $3.6 and other of $3.8. [29 18 + 3.6 + 3.8 = 18) 3-34 b. There are limited insights available from a single years direct method cash flow statement. However, we can compare some cash flow relationships with their income statement analogues: COGS to sales Cash inputs to cash collections 70.3 69.5% 8.3% 11.8% Selling, research, and admin. expense to sales Cash expenses to cash collections The second set of ratios shows the difference. Westvacos cash expenses collections are much higher than the relationships. The explanation (see that Westvaco had a large noncash which reduced net expenses. c. more significant as a % of cash income statement chapter 12) is pension credit, The company increased CFO (from $391 million in 1997 to $583 million in 2000) and substantially reduced its capital expenditures (see note H) from $621 million in 1997 to $229 million in 1999, generating the free cash flow needed to make acquisitions. Additional data used in Figure 3-1 tells the same story: CFO FCF1 FCF2 1997 $391 208 202 1998 1999 $407 $413 (9) 207 (9) 183 2000 $583 369 (892) FCF1 = CFO net capital expenditures FCF2 = CFO CFI (where CFI = capital expenditures plus cash flows for acquisitions and from divestitures) The company borrowed funds in 1997 but reduced that debt in 1998 and 1999; outflows for dividends are lower but not significantly so. Thus, Westvaco used higher CFO and borrowing, combined with lower capital expenditures, to finance its 2000 acquisitions. 3-35 12.{M}a. Hertz Corp. ($ millions) 1989 $ (117) 3,003 (2,354) $ 532 1990 $ 92 4,024 (3,434) $ 682 1991 $ 286 4,016 (3,784) $ 518 Reported cash from Add back: purchases Subtract: sales of Adjusted cash from b. operations of equipment equipment operations As reported, cash flow from operations shows steady improvement over the period 1989 - 1991, changing from a negative to a positive amount. After adjustment, the trend is eliminated; cash flow from operations is lower in 1991 than in either 1989 or 1990. The improvement in reported cash flow from operations was the result of reducing Hertz's net investment in rental equipment. c. Reported cash flow for investing Subtract: purchases of equipment Add back: sales of equipment Adjusted cash flow for investing d. 1989 $ (133) (3,003) 2,354 $ (782) 1990 $ (79) (4,024) 3,434 $ (669) 1991 $ (72) (4,016) 3,784 $ (304) Reported cash flow for investing shows little change over the three-year period. After reclassification of equipment purchases and sales, cash flow for investing drops by more than half in 1991. After reclassification it reflects the sharp drop in net car and truck purchases in that year. Free cash flow can be defined as cash flow from operations less investment required to maintain productive capacity. If we assume that Hertz's investments are solely to maintain existing capacity, then free cash flow equals cash flow from operations less cash flow for investing: 1989 $ (117) (133) $ (250) 1990 $ 92 (79) $ 13 1991 $ 286 (72) $ 214 e. Reported cash from operations Less: reported cash for investing Equals: free cash flow 3-36 3-37 Note that reclassification of purchases and sales of revenue equipment has no effect on free cash flow: 1989 $ 532 (782) $ (250) 1990 $ 682 (669) $ 13 1991 $ 518 (304) $ 214 Adjusted cash from operations Less: adjusted cash for investing Equals: free cash flow Thus by defining free cash flow in a manner which subtracts out all expenditures required to maintain the operating capacity of the firm, whether capitalized or not and regardless of classification, the effects of accounting and reporting differences can be overcome. This solution requires, of course, the identification of the amounts of such items. f. When equipment is purchased, the full amount is reported as an operating cash outflow. For leased equipment, only the periodic lease payments are reported as operating cash outflows. Thus, for Hertz, leasing increases reported cash flow from operations. When equipment purchases are classified as investing cash flows, then leasing reduces operating cash flows relative to purchases. That is because the outflow connected with purchases (or any other capitalized expenditure) is never classified as an operating outflow. [See Chapter 11 for a detailed analysis of this issue.] g. 3-38 13.{M}a. Repsol SFAS 95 Statement of Cash Flows Millions Years ended 12/31 1998 1999 Operating activities: Funds from operations* 2,150 3,182 Subsidies and other revenues 92 74 Net assets from consolidation (16) (520) Change in working capital 830 4,949 Cash from operating activities 3,056 7,685 Investing activities: Investments in property Acquisitions Other investments Disposal of property Disposal of investments Minority interests Cash from investing activities Financing activities: Loans received Other long-term debt Dividends paid Shares issued Debt repaid or reclassified Cash from financing activities Net change Net effect of currency changes (1,723) (197) (297) 111 116 11 (1,979) 544 11 (517) (1,199) (1,161) (84) (84) (2,630) (14,277) (804) 767 152 25 (16,767) 12,942 23 (567) 5,665 (8,267) 9,796 714 714 Assumptions: 1. Subsidies and other revenues are shown as a component of cash flows from operating activities because they include revenues and cash (subsidies) presumably received from the government. We have assumed (and it appears so from data provided) that this item was not included in income (part of funds from operations). 2. Net assets from consolidation are defined (elsewhere in Repsols financial statements not provided in the problem) as non-cash items resulting from accounting differences within the consolidated group. These are shown as a component of cash from operating activities to offset any items included in income. 3-39 Note that Repsols statement of sources and applications of funds does not show the change in cash. The net change in cash in the table above reflects all changes except the effect of currency changes. If we separate out the actual change in cash and equivalents (65 in 1998, 297 in 1999) we can produce a statement that is similar to the US GAAP format: Millions Cash from operating activities Plus: increase in cash and equivalents Adjusted cash from operating activities Cash from investing activities Cash from financing activities Net effect of currency changes Change in cash and equivalents b. 1998 3,056 65 3,121 (1,979) (1,161) 84 65 1999 7,685 297 7,982 (16,767) 9,796 (714) 297 A sources and uses statement does not recognize differences among operating, investing, and financing activities. SFAS 95 requires grouping of similar transactions in these three categories. Separate disclosure of the cash consequences of operating activities facilitates (1) an evaluation of the earnings and cash generating ability of the firm, (2) the quality of revenue and expense recognition principles used to prepare the financial statements, and (3) the computation of free cash flows. Separate disclosure of investing activities permits an assessment of capital expenditures, growth, and investments in other entities. Information about financing activities shows how the company finances its capital needs and dividend payments. Although the sources and uses format provides these data (and in gross form as required by SFAS 95) for investing and financing activities, it does not provide the disclosure by category; In contrast, SFAS 95 facilitates the analysis of free cash flows and other analytical measures. c. Separate disclosure of the components of (1) the change in working capital accounts, (2) non-cash income and expense, (3) net assets from consolidation, 3-40 d. (4) whether any restructuring charges are included and where they were reported, and (5) debt repaid or reclassified would be useful. The total source of funds (and year-to-year changes in that measure) is useless as a measure of liquidity. Cash from operations, which aggregates cash inflows and outflows by type of activity, is far more useful. However, CFO (like any bottom line) cannot be used without understanding the source of its changes. The following table shows the components of CFO: Repsol Cash from Operations ( Millions) Years ended 12/31 1998 1999 Operating activities: Funds from operations* 2,150 3,182 Subsidies and other revenues 92 74 Net assets from consolidation (16) (520) Change in working capital 830 4,949 Cash from operations 3,056 7,685 Difference 1,032 (18) (504) 4,119 4,629 At first glance, the 1999 increase in CFO suggests an improvement in liquidity. The increase is primarily due to the change in working capital (4,119 of the total change of 4,629) and secondarily the increase in funds from operations (1,032 of the total change of 4,629). We need to know whether the change is the continuation of a trend or a reversal. It would help to have the components of funds from operations and the changes in working capital to evaluate the sustainability of the increases. For example, did the company securitize receivables, accelerating cash collections? Has the company delayed payments to suppliers? Has it reduced production, decreasing outflows for production costs? e. (i) In its Statement of the Source and Application of Funds, Repsol reports the net effect of currency changes as a use (application) of funds. SFAS 95 requires separate (i.e., not as a component of operating, investing, and financing cash flows) reporting of these effects. (ii) The net effect of currency changes reflects the aggregate impact of translating the assets and liabilities of foreign operations. Because it is represents exchange rate changes rather than 3-41 actual cash consequences, the SFAS 95 treatment is better and in general, the amount should not influence valuation and investment decisions. However, see Chapter 15 for additional discussion of this issue. 3-42 14.{L}a. 2001 Direct Method Statement of Cash Flows Sales Change in accounts receivable Cash collections Cost of goods sold Change in inventories Change in accounts payable Cash inputs SG&A Change in prepaid expenses Severance payments Cash expenses Interest expense = paid Cash flow from operations b. $ 8,000 (150) $ 7,850 (5,000) (165) 215 $(4,950) (2,000) (25) (25) $(2,050) (150) $ 700 The adjusted income statements are presented below. After adjustment, (recurring) net income shows a declined in 2001 in contrast to the reported increase in the financial statements. Income Statement Sales COGS SG&A Depreciation Interest expense Net income 2000 $7,100 (4,200) (1,675) (250) (150) $ 825 2001 $8,000 (5,000) (2,000) (250) (150) $ 600 Note: The year 2000 income statement excludes the restructuring charge of $125 ($100 has been added to COGS for the inventory write-down and $25 to SG&A for the severance payment). The 2001 gain on sale of a division has been eliminated from the computation of net income. 3-43 c. Comparison of 2000 to 2001 change in accrual-based items to the change in their cash analogs (after removal of nonrecurring items): 2000 $7,100 7,000 0.986 (4,200) (4,100) 0.976 (1,675) (1,750) 1.045 2001 $8,000 7,850 0.981 (5,000) (4,950) 0.990 (2,000) (2,025) 1.013 % change 12.68% 12.14% Sales Cash collections Cash collections/sales Cost of goods sold Cash inputs Cash inputs/COGS SG&A Cash expenses Cash expenses/SG&A 19.05% 20.73% 19.40% 15.71% The changes in sales exceed their cash analog, cash collections, but only marginally. Cash inputs are higher than amounts recorded as expense likely due to delayed recognition of expenses and/or accumulation of inventories due to declining quality of or demand for products. Again, however the difference in the changes is not significant, SG&A expense is higher on an accrualbasis; likely due to payment in 2000 of prior accruals or prepayment of 2001 expenses. d. The decline in CFO can be a function of 1. changes in the timing of cash collections (disbursements) relative to the income (expense) components 2. lower income (after adjusting for the nonrecurring nonoperating events) We quantify both effects below. Effect of changes in the timing of cash collections (disbursements) relative to income (expense) components Effect of change in cash collections/sales (0.981-0.986) x $8,000 = Effect of change in cash inputs/COGS (0.990-0.976) x $(5,000) = 3-44 $(40) (70) Effect of change in cash expenses/SG&A (1.013-1.045) x $(2,000) = Net effect 64 $(46) As noted in part c. the differences between the income and cash flow counterparts are relatively small. Thus these differences did not contribute significantly to the drop in CFO, contributing only $46 out of the $300 decline. The remaining decline was due to the drop in income and can be calculated as Effect of changes Change in sales:0.986 Change in COGS: 0.976 Change in SG&A: 1.045 Net effect in revenue and expense x [$8,000 - $7,100] x [(5,000) (4,200)] x [(2,000) (1,675)] on CFO = $ 887 = (781) = (340) $(234) The decline in CFO was $300. Most of the effect ($234) was caused by a drop in income. In spite of the fact that revenues increased, expenses grew at a faster rate. (Revenue grew at a rate of 12.7% whereas expenses grew at a rate of almost 20%).2 e. Nonrecurring charges will not contribute to future earnings and cash generating ability, that is, they do not contribute to value and should be excluded for valuation purposes. 2 The CFO decline of $300 can be reconciled as follows: Effect of changes in timing $( 46) Income effect (234) Nonrecurring severance payment (25) $(305) The difference of $5 is due to rounding errors. If the calculations were done with the cash/income ratios taken to four or five decimal places then the timing effect would be (42) and the income effect would be (233). 3-45 15.{L}a. 2001 Direct Method Cash Flow Statement Sales $7,103 Change in accounts receivable (138) Cash collections $6,965 Cost of goods sold Inventories Accounts payable Restructuring charge Cash inputs SG&A** Prepaid expenses Restructuring charge Cash expenses Interest expense = paid Cash flow from operations (4,295) (114) 15 103 ($4,291) $(1,712) (47) 22 $(1,737) (146) $791 b. The adjusted income statements are presented below. After adjustment, (recurring) net income shows a declined in 2001 in contrast to the reported increase in the financial statements. Income Statements Sales COGS SG&A Depreciation Interest expense Net income 2000 $7,103 (4,192) (1,690) (235) (146) $ 840 2001 $7,047 (4,122) (1,724) (260) (149) $ 792 3-46 c. Comparison of 2000 to 2001 change in accrual-based items to the change in their cash analogs (after removal of nonrecurring items): 2000 2001 % change Sales $7,103 $7,047 -0.79% Cash collections 6,965 7,182 3.12% Cash collections/sales 0.981 1.019 Cost of goods sold Cash inputs Cash inputs/COGS SG&A* Cash expenses Cash expenses/SG&A $(4,192) $(4,122) (4,291) (4,097) 1.024 0.994 $(1,690) $(1,724) (1,737) (1,634) 1.028 0.948 -1.67% -4.52% 2.01% -5.93% The changes in sales are lower than their cash analog, cash collections, because of higher collections, i.e., a decrease in receivables indicating more conservative revenue recognition relative to cash receipts and/or more efficient collection procedures in 2001. Cash inputs declined more than comparable amounts recorded as expense likely due to delayed recognition of expenses and/or prior accumulation of inventories due to declining quality of or demand for products in 2000. Similarly cash SG&A expense fell in 2001 despite an increase in SG&A itself; possibly because of a decline in prepaid expenses or an increase in accruals. The improvements in efficiency of cash relative to income is reflected in the cash/income ratios as each one improved (i.e. increased for cash/revenue and declined in cash/expenses see part d.) d. As income declined (after adjusting for the nonrecurring nonoperating events) the increase in CFO must be a function solely of changes in the timing of cash collections (disbursements) relative to the income (expense) components 3-47 Effect of changes in the timing of cash collections (disbursements) relative to income (expense) components Effect of change in cash collections/sales (1.019-0.981) x $7,047 = 268 Effect of change in cash inputs/COGS (0.994-1.024) x $(4,122) = 124 Effect of change in cash expenses/SG&A (0.948-1.028) x $(1,724) = 138 Net effect 530 The overall increase in CFO was (1,280-791=) $489. The increase was solely due to more effective cash management techniques with improved collections accounting for more than half of the improvement.3 Additionally, the company was able to control its cash payments for inventory and SG&A. Although reported income increased, income was not a contributing factor to the increased CFO. If anything income has a negative impact on CFO as after removing nonrecurring and nonoperating events income declined. e. Nonrecurring charges will not contribute to future earnings and cash generating ability, that is, they do not contribute to value and should be excluded for valuation purposes. 3 Of the $41 difference between $530 and $489, $22 is due to severance pay and $18 is due to declining income. The $18 amount can be calculated by following the procedure used in problem 3-14 part d. 3-48 16.{S}a. Direct Method Statement of Cash Flows for Year 2 Sales Change in accounts receivable Cash collections Cost of goods sold Change in Inventories Change in Accounts payable Cash inputs SG&A Depreciation Accrued liabilities Cash expenses Interest expense = paid Cash flow from operations b. $12,000 (240) $11,760 (7,100) (200) (240) ($7,540) (3,700) 1,000 (25) ($2,725) ($300) $1,195 The comparison of the income statement components with their cash flow counterparts is presented below. Year 1 Year 2 % change Sales $10,000 $12,000 20.0% Cash collections $9,800 $11,760 20.0% Cash collections/sales 0.98 0.98 Cost of goods sold Cash inputs Cash inputs/COGS SG&A* Cash expenses Cash expenses/SG&A Interest expense Interest paid Interest paid/Interest expense * (6,000) (5,800) 0.97 (2,000) (2,000) 1.00 (300) (275) 0.92 (7,100) (7,540) 1.06 (2,700) (2,725) 1.01 (300) (300) 1.00 18.3% 30.0% 35.0% 36.3% 0.0% 9.1% Adjusted for depreciation expense and assuming depreciation is equivalent in both years. From the data it is apparent that payments for inventory had the biggest impact on CFO. Although COGS only increased by 18.3%, payments for inventory increased 30%. The cash inputs/COGS ratio increased by .09 (from 0.97 to 1.06). This increase of 9% translates (based on COGS of $7,100) to an increased cash outflow of $639 accounting for the decrease in CFO4 as the effects of the cash/income relationships of the other income statement components is 4 The actual decrease in CFO was only $530 as the $639 outflow was offset by increases in CFO resulting from higher income. 3-49 small. 3-50

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Identifying Repair Targets in Action Control DialogueKotaro Funakoshi and Takenobu Tokunaga Department of Computer Science, Tokyo Institute of Technology 2-12-1 Oookayama Meguro, Tokyo, JAPAN {koh,take}@cl.cs.titech.ac.jpAbstractThis paper propos
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Spoken Dialogue for Simulation Control and Conversational TutoringElizabeth Owen Bratt CSLI, Stanford University, Stanford, CA 94305 ebratt@csli.stanford.edu Karl Schultz CSLI, Stanford University, Stanford, CA 94305 schultzk@csli.stanford.edu Brady
UPenn - E - 89
D i a l o g Control in a Natural L a n g u a g e S y s t e m 1Michael Gerlach Universit~t Hamburg Jungiusstra6e 6 Helmut Horacek Fachbereich Informatik Projektgruppe WISBER D-2000 Hamburg 36 F.R.G. the dialog, at least to the extent that is required
UPenn - P - 88
Cues and control in Expert-Client DialoguesSteve Whittaker & Phil Stenton Hewlett-Packard Laboratories Filton Road, Bristol B S I 2 6 Q Z , U K . email: sjw~hplb.csnetApril 18, 1988AbstractWe conducted an empirical analysis into the relation bet
UPenn - P - 96
Two Sources of Control over the Generation Instructions*Anthony HartleyLanguage Centre University of Brighton, Falmer Brighton BN1 9PH, UK afh@it ri. bton. a c . uk 1of SoftwareC6cile Paris tInformation Technology Research Institute University
UPenn - C - 82
COLING82, J. Horeck~ (ed.) North-Holland Publishing Company Academia, 1982A MESSAGE-PASSING CONTROLS R C U E F R TEXT U D R T N I G TUTR O N E S A DN Brian Phillips and JamesA. Hendler Texas Instruments Inc. Dallas, Texas, USAThis paper describe
UPenn - M - 92
GE NLTOOLSET : DESCRIPTION OF THE SYSTEM AS USED FOR MUC- 4George Krupka, Paul Jacobs and Lisa Ra u Artificial Intelligence Laboratory GE Research and Developmen t Schenectady, NY 12301 US A E-mail : rau@crd .ge.co m Phone : (518) 387 - 505 9 and Lo
UPenn - M - 91
DESCRIPTION OF THEGE:NLTOOLSETMUC- 3SYSTEM AS USED FO RGeorge Krupka, Paul Jacobs, Lisa Rau, and Lucja Iwaiisk a Artificial Intelligence Laboratory GE Research and Developmen t Schenectady, NY 12301 US A krupka@crd .ge.comAbstrac tThe GE
UPenn - C - 86
A DESCRIPTION OF THE VESPRA SPEECH PROCESSING SYSTEMR o l f Haberbeck FU B e r l i n FB G e r m a n i s t i k D-tO00 B e r l i n 33 TU B e r l i n FB I n f o r m a t i k D-tO00 B e r l i n 10ABSTRACT The VESPRA system processing of of utterances
UPenn - MUC - 7
Using Collocation Statistics in Information ExtractionDekang Lin Department of Computer Science University of Manitoba Winnipeg, Manitoba, Canada R3T 2N2 lindek@cs.umanitoba.ca and Nalante, Inc. 7 Blackwood Bay, Winnipeg, Manitoba, Canada lindek@nal
UPenn - J - 98
Computational LinguisticsVolume 24, Number 3Vygotsky and Cognitive Science: Language and the Unification of the Social and Computational MindWilliam Frawley (University of Delaware) Cambridge, MA: Harvard University Press, 1997, ix+333 pp; hardb
UPenn - N - 07
RH: A Retro Hybrid ParserPaula S. Newmannewmanp@acm.org Section 5 examines some closely-related work, and Section 6 discusses some implications.AbstractContemporary parser research is, to a large extent, focused on statistical parsers and deep-u
UPenn - N - 06
Incorporating Gesture and Gaze into Multimodal Models of Human-to-Human CommunicationLei Chen Dept. of Electrical and Computer Engineering Purdue University West Lafayette, IN 47907chenl@ecn.purdue.eduAbstractStructural information in language i
UPenn - C - 90
A PARLOG Implementation of Government-Binding TheoryRobert J. Kuhns 205 Walnut Street Brookline, MA 02146 USAABSTRACT Tile purpose of this paper is to report on research on a parallel parser based on the principles and constraints of GovernmentBi
Mississippi State - AIS - 3803
LeadershipAISE 3803ObjectivesAnalyze various definitions of leadership. Examine myths about leadership. Understand the importance of concepts such as needs and motivation. Explain the differences among the motivational theories of Maslow, Alderf
Mississippi State - AIS - 3324
Mississippi State - AIS - 3803
Conflict ManagementAISE 3803ObjectivesDefine conflict in group settings. Determine the sources of conflict. Identify the causes of conflict. Discuss conflict management strategies and potential outcomes.Functional consequences. Dysfunctional con
Mississippi State - CLASS - 6
Annual PlanningObjectivesDescribe different planning groups/advisory groups. n Discuss the tasks of planning groups. n Discuss the seven elements where decisions need to be made.nASSUMPTIONSEffective educational programs dont just happen; they
Mississippi State - CLASS - 8503
Annual PlanningObjectivesDescribe different planning groups/advisory groups. n Discuss the tasks of planning groups. n Discuss the seven elements where decisions need to be made.nASSUMPTIONSEffective educational programs dont just happen; they
Mississippi State - AIS - 3324
Mississippi State - AIS - 3324
AEE 3324 Methods of Teaching Agricultural and Extension Education] Fall 1997 Lecture 17 Title of Lesson: Situation: Analyzing Psychomotor Tasks 15 students preparing for student teaching or internships. Six of the students are teaching option and the
Mississippi State - AIS - 3203
Where are we so far? Organizing InformationIdentified topic Identified who you are writing for Identified the purpose of your writing You have begun to research your topicObjectives Now, you need to begin organizing your information.Discuss the b
Mississippi State - CLASS - 1
AEE 8703 Evaluation of Programs in Agricultural and Extension EducationMichael E. NewmanMississippi State UniversityAEE 8703Class 1 - Evaluation ConceptsEveryone is an evaluatorRecipes Spouses/ Partners Instructors StudentsWhat is evaluatio
Mississippi State - CLASS - 8703
AEE 8703 Evaluation of Programs in Agricultural and Extension EducationMichael E. NewmanMississippi State UniversityAEE 8703Class 1 - Evaluation ConceptsEveryone is an evaluatorRecipes Spouses/ Partners Instructors StudentsWhat is evaluatio
Mississippi State - MOD - 16
AlS 4303~6303 Applications of Information Technologies in Agricultural Learning Practical Final Spring Semester 2000 General Directions: You will have three hours to complete the test. All of the necessary applications are available on the computer.
Mississippi State - MOD - 4303
AlS 4303~6303 Applications of Information Technologies in Agricultural Learning Practical Final Spring Semester 2000 General Directions: You will have three hours to complete the test. All of the necessary applications are available on the computer.
Mississippi State - AIS - 3324
Mississippi State - AIS - 3803
Leadership CharacteristicsAISE 3803ObjectivesExamine the common characteristics of leaders. Discuss attributes found in leadership roles. Explore the effects of problem solving and decision making in a leadership role.Characteristics of Leaders
Mississippi State - AIS - 3324
Mississippi State - SERA - 19
Health SERA 19 Strategic Planning NotesChair: Alan Barefield, Associate Director, Southern Rural Development Center September 10, 2007 Dr. Gail Cramers Report (Experiment Station Advisor)Time to start working on SERA reauthorization Propo
UPenn - ISMRM - 2008
Utilization of Principal Component Analysis for Improved Perfusion Measurements in Highly Undersampled Radial DCEMRI1J. Guo1, M. A. Rosen2, and H. Song1 Laboratory for Structural NMR Imaging, Department of Radiology, University of Pennsylvania Sch
UPenn - ISMRM - 2008
Direct imaging of spinal cord axons in intact lamprey by diffusion-weighted -MRI1A. C. Wright1, G. Zhang2, S. L. Wehrli3, M. E. Selzer2, and F. W. Wehrli1 Laboratory for Structural NMR Imaging, Department of Radiology, University of Pennsylvania,
Mississippi State - SERA - 19
The Economic Impact of Telemedicine Service in a Rural HospitalBrian Whitacre Oklahoma State University SERA-19 Meetings Sep. 10-12, 2007The Issues Telemedicine has been hailed as a saving grace for rural health care Noted benefits include: Lar
HKU - ACCOUNTING - BUSI0027
Chapter 4 SolutionsOverview: Problem Length {S} {M} {L} 1.{S} a. (i) Problem #s 1, 9-12 3, 5, 6, 13-18, 22, 24 2, 4, 7, 8, 19-21, 23, 25-27The identical amount is subtracted from both numerator (CA) and denominator (CL). Since the ratio (before su
UPenn - HOGFEST - 2006
Wharton Hogfest 2006 ScheduleSaturday - Round Robin Field 1 Field 2 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00 16:30 17:00 17:30 18:00 18:30 19:00 19:30 20:00 20:30 21:00 21:30 22:00 F
UPenn - HOGFEST - 2006
REGISTRATION CERTIFICATIONMessrs. John T. Clark and Dhruv A. Prasad Co-Presidents, Wharton Rugby Football Club Suite 300 Huntsman Hall 3730 Walnut Street Philadelphia, PA 19103 Dear Messrs. Clark and Prasad: In connection with the participation of _
UPenn - HOGFEST - 2006
WHARTON RUGBY FOOTBALL CLUBSuite 300 Huntsman Hall 3730 Walnut Street Philadelphia, PA 19104 www.wharthogs.comThe Wharton Rugby Football Club ("WRFC") is pleased to invite you to HogFest 2006. Now in its 11th year, this tournament traditionally dr
UPenn - HOGFEST - 2006
WHARTON RUGBY FOOTBALL CLUBSuite 300 Huntsman Hall 3730 Walnut Street Philadelphia, PA 19104 www.wharthogs.comHOGFEST 2006 Team Registration FormBASIC INFORMATION: School Name: _ Captain Name: _ Captain Email: _ Club President Name: _ Club Presi
Mississippi State - AIS - 2613
_ _Solving Synthesis Problems_ _Intro to Info & Decision Science in Agro-Ecosystems Unit 5__ _ __Objectivess_ _ _ __ _ _ssBe able to recognize synthesis type problems Be able to organize a solution to a synthesis type problem Be ab
Mississippi State - AIS - 3324
Mississippi State - AIS - 3324
Mississippi State - AIS - 3324
Mississippi State - AIS - 3203
Steps in the Writing ProcessWriting is one art form that can be practiced anywhere at almost any time.What emerges will not always be a work of art; yet it could be.Theodore Bernstein The Careful Writer, 1965Objectives To develop an understandin
Mississippi State - AIS - 3803
Team BuildingAISE 3803Objectives Be able to explain the difference between a group and a team. Learn how to recognize situations that call for teamwork rather than group behavior. Learn how to build a team from a group.Question What is the d
Mississippi State - AIS - 3803
AISE 3803Leadership Development In Agriculture and Life SciencesAISE 3803What Is Leadership?ObjectivesIntroduce AISE 3803 Brainstorm ideas about Group Organization. Brainstorm ideas about Leadership.LeadershipThe activity of influencing peo
Mississippi State - AIS - 3803
Leadership Behaviors, Tasks and FunctionsAISE 3803ObjectivesIdentify behavior sets present in leaders. Identify leadership tasks and functions. Define formal leadership. Describe the guidelines to effective leadership. Describe the difference bet
Mississippi State - AIS - 3203
Writing Recommendation ReportsObjectivesDefine recommendation reports. Describe the elements in a recommendation report. Write recommendation reports.DefinitionAnalyze a problem, determine the best solution, and then recommend the best solution
Mississippi State - AIS - 2613
_Categories of Information SourcesInformation & Decision Science in Agro-Ecosystems Unit 3: Accessing & Analyzing Information_ _ __ _ _ __Are these good sources of information?n n n n n n n n_ __ _ _ _ _The Reflector The Starkville Daily
Mississippi State - MOD - 4303
1Incorporating Style Sheets into HTMLAIS 4303/6303 Module 142 3Cartoon Objectives? Be ? Beable to interpret HTML 4.0 style sheets able to include a style sheet in a HTML document ? Be able to link a HTML document to a style sheet4Style S
Mississippi State - EE - 6263
September 16, 1999EE 4263/6263 Homework #3 SOLUTIONSPage 1 of 2Name: SOLUTIONS1. a) For the resistor-load inverter below, find the value of R needed for the switching point to occur at VDD/2. Use n = 75A/V2, VTn = 0.7V, and VDD = 5V. Recall
Mississippi State - EE - 6263
EE 4263/6263 Lecture NotesApril 28, 1999page 1MOS Transistors as SwitchesG (gate) D (drain) S (source) nMOS transistor: Closed (conducting) when Gate = 1 (Vdd, 5V) Open (non-conducting) when Gate = 0 (ground, 0V)GpMOS transistor: Closed (c
Mississippi State - EE - 6263
EE 4263/6263April 6, 2000Page 121Pipelined System with Dynamic LatchesIn F GOut compute F compute GSuffers from clock overlap problem Try C2MOS latchesVDD VDD VDDInF GOutA C2MOS-based pipelined circuit is race-fr
Mississippi State - EE - 4253
For:sanjay Printed on:Tue, Sep 15, 1998 22:47:34 Document:lab3 Last saved on:Tue, Sep 15, 1998 22:25:38Lab3: CMOS Inverter Using Schematic EntryIntroductionThe purpose of this lab is to introduce the student to the Cadence design system for schem
Mississippi State - CSE - 2813
TEST 3 CS2813 DISCRETE STRUCTURES KEY There are 110 points on this test. You may work all 110 for a possibility of 10 point bonus or you may omit 10 points. 1. (10 points) Show that the sequence {an}, an = 24n + 3n4n is a solution of the recurrence r
Mississippi State - CS - 8011
Suggestions for Oral PresentationsEdward B. Allen CS 8021 Graduate Seminar II1AcknowledgmentsThanks to Dr. Julia Hodges for an earlier version of this material.2Outline Introduction Preparing Visual aids Presenting Conclusions3Intr
Mississippi State - CS - 8011
Use of Its and Its A Few Common English ErrorsMistakes to Avoid its it is its possessive form of it Examples: Correct: Its true color is hard to see because its so dark. Incorrect: Its true color is hard to see because its so dark.Acrony
Mississippi State - CS - 8843
Mississippi State - CS - 8843
Mississippi State - CS - 8843