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Unformatted text preview: ansactions. SuperValu has shown
significantly higher cash from operations than net income in all three years. Even if the large impairment
charge in 2009 is adjusted out, earnings would have been less than cash from operations. ID14–5
Shortcuts to “cash flow”, such as adding back depreciation and amortization (noncash expenses) to net
income, do not take into consideration all of the changes that affect cash. The indirect statement of cash
flow starts by adding back these noncash expenses, but the statement continues with the cash flow
adjustments. Changes to working accounts are also included in the calculation to come up with the
operating cash flow number. The most prominent example of the shortcoming of simply adding
depreciation expense to earnings to calculate cash flow is the case of slowing receivables. If a company
is growing rapidly because of additional credit sales, net income should also grow (holding all other factors ID14–5 Concluded constant). However, if those credit sales were made to companies without the ability or willingness to
pay, net income will overstate the company’s ultimate cash position. As
receivables become stagnant and build up on the balance sheet, the statement of cash flow would deduct
this increase from net income to arrive at the cash flow number. The shortcut of simply adding back
depreciation to net income will not reflect the problem with collections. Not including the changes to the
current accounts (such as accounts receivable) runs the risk that the reader of the financial statements
will not get a true picture of the company’s cash position. ID14–6
a. b. The annual depreciation expense is decreasing, which would imply that the company has less long lived
assets that require annual cost allocation. The company appears to not be investing in its fixed asset
base, with long term assets becoming fully depreciated and not being replaced with new assets.
The issuance of stock to employees as a form of compensation does not require the outlay of cash. There
is a theoretical cost to the company in the form of the opportunity cost of not being able to sell those
shares on the open market, but the grantin...
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