Chapter_17web - 3. A large part of income comes from an...

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EXERCISES FOR CHAPTER 17 With Solutions Exercise 1. The following is the cash flow from operations section of a firm’s cash flow statement (in millions of dollars): 2003 2002 Net income $4,782 $2,562 Depreciation and amortization 467 410 Restructuring charge ( 400) Change in net accounts receivable (1,783) 632 Change in accrued expenses ( 562) 125 Change in deferred revenue (2,317) ( 56) Cash flow from operations 187 3,673 What red flags do you see in this statement regarding earnings quality for 2003? (Refer to pp. 617-618) Solution The red flags in 2003: 1. Cash from operations is far less than net income; a large proportion of net income is from accruals. 2. $400 million of net income is from bleeding back a previous restructuring charge.
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Unformatted text preview: 3. A large part of income comes from an increase in net accounts receivable (1,783). Is this due to lowering bad debt estimates? Are these receivables good quality or are they more likely to default? Are customers taking longer to pay because they have credit problems? 4. A large part of income comes from reducing deferred (unearned) revenue (that is, sales made in earlier periods but recognized in the current period), not from current sales. 5. There has been a reduction in accrued expenses. Is the firm underestimating their expenses?...
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