ch14 - CHAPTER 14 THE STATEMENT OF CASH FLOWS BRIEF...

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CHAPTER 14 THE STATEMENT OF CASH FLOWS BRIEF EXERCISES BE14–1 a. Depreciation expense is shown as an adjustment to net income to calculate cash flow. Depreciation expense is added back to net income because it is a non-cash expense. This means that it is deducted in the calculation of net income but there is no cash expenditure related to depreciation. b. Net income plus depreciation does not equal net cash provided by operating activities because all of the changes in current assets and current liabilities are also shown in the cash provided by operating activities section. Increases in current asset accounts represent a use of cash and increases in current liabilities present a source of cash. c. The estimated net change in current assets and current liabilities is $837 million. This is calculated by taking $3.7 billion net cash provided by operating activities minus (net income of $2.6 billion plus $263 million of depreciation and amortization). BE14–2 During 2003 Pier One collected $1, 897.2 million from its customers. This can be calculated as follows: Accounts receivable, beginning balance $ 11.4 million Add: 2003 Sales 1.9 billion Less: Accounts receivable, ending balance 14.2 million Cash collected during 2003 $1,897.2 million BE14–3 a. Cost of inventories purchased during 2003 equals: Inventory, ending balance $333 million Add: 2003 Cost of sales 1 billion Less: Inventory, beginning balance 275 million Inventory purchased in 2003 $1,058 million b. Cash payments made to suppliers during 2003 equals: Accounts payable, beginning balance $ 79 million Add: 2003 inventory purchases 1,058 million Less: Accounts payable, ending balance 77 million Cash payments to suppliers made in 2003 $ 1,060 million BE14–4 a. Agilent Lucent 1
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Cash from operations $ (144) $ (948) Cash from investing (203) 758 Cash from financing 110 1,051 Change in cash $ (237) $ 861 b. Both companies are generating cash from financing activities—that is, both companies are raising cash from equity and/or debt issuances. Agilent is investing cash in long-term assets, while Lucent is raising cash by selling off long-term assets. Finally, both companies are losing cash from operations. Overall, Agilent is losing cash, while Lucent is growing cash. However, Lucent’s growth in cash is helped by its sale of property, plant and equipment and other long-term assets. c. Cash from operations can exceed the net loss for Agilent due to depreciation or other non- cash expenses. For Lucent, cash from operations is less than the reported net loss. This situation can be seen as a negative because it indicates that reported earnings (loss) are being “created” from transactions that were not generating cash. EXERCISES E14–1 1. Investing activity 2. Financing activity 3. Operating activity 4. Financing activity 5. Investing activity 6. Investing activity (for the cash paid for the building) Financing activity (for the mortgage payable) 7. Financing activity (for the principal payment) Operating activity (for the interest payment) 8. Operating activity 9. Financing activity 10. Operating activity E14–2 1. Not included on the statement of cash flows because it does not affect cash. As proof, the entry for this event would be:
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