final_exam_f02 - 15.501/516 Final Examination December 18,...

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15.501/516 Final Examination December 18, 2002 Student Name: __________________________________________________ School: __________________________________________________ Professor: ___________________________________________________ The exam consists of 13 numbered pages. Be sure your copy is not missing any pages. There are 125 points in total -- point allocations are stated at the beginning of each question. You have 3 hours. Budget your time well . We suggest you quickly go over the entire exam first before starting. Write your answers in the space provided, and show any computations you make. Write as legibly as possible -- we can't grade what we can't read! If a question is unclear, make an appropriate assumption that does not contradict any information given in the question. GOOD LUCK !! 1
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I. Interpreting the statement of cash flows. (10 points) The following exhibit presents the statement of cash flows for Nike, Inc., maker of athletic shoes, for three recent years. Nike Inc.: Statement of Cash Flows (amounts in millions) Year 1 Year 2 Year 3 Operations Net income 167 243 297 Depreciation and amortization 15 17 34 Other Addbacks/Subtractions (5) 5 3 Working Capital provided by Operations 177 265 324 (Increase) Decrease in Accounts Receivable (38) (105) (120) (Increase) Decrease in Inventories (25) (86) (275) (Increase) Decrease in Other Operating Current Assets (2) (5) (6) (Increase) Decrease in Accounts Payable 21 36 59 (Increase) Decrease in Other Operating Current Liabilities 36 22 32 Cash Flow from Operations 169 127 14 Investing Sale of Property, Plant and Equipment 3 1 2 Acquisition of Property, Plant and Equipment (42) (87) (165) Acquisition of Investment (1) (3) (48) Cash Flow from Investing (40) (89) (211) Financing Increase in Short-term Debt 0 0 269 Increase in Long-term Debt 0 1 5 Issue of Common Stock 3 2 3 Decrease in Short-term Debt (96) (8) 0 Decrease in Long-term Debt (4) (2) (10) Dividends (22) (26) (41) Cash Flow from Financing (119) (33) 226 Change in Cash 10 5 29 Cash, Beginning of the Year 74 84 89 Cash, End of the Year 84 89 118 Answer the following questions: 1. Why did Nike experience increasing net income but decreasing cash flow from operations during this three-year period? (5 points) 2
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2. How did Nike finance its investing activities during the three-year period? Evaluate the appropriateness of Nike's choice of financing during Year 3. (5 points) 3
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II. Inventory accounting (10 points) The inventory footnote to the annual report of Ballistic Brothers & Co. reads in part as follows: Because of continuing high demand throughout the year, inventories were unavoidably reduced and could not be replaced. Under the LIFO system of accounting, used for many years by Ballistic Brothers & Co., the net effect of all the inventory changes was to increase pretax income by $900,000 over what it would have been had inventories been maintained at their physical levels at the start of the year. The price of Ballistic Brothers & Co.’s merchandise purchases was $26 per unit during
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final_exam_f02 - 15.501/516 Final Examination December 18,...

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