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The sale ofthesubsidiary in2006 resultedin a gain

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Unformatted text preview: and amortization reduced SuperValu's net income but did not have any effect on cash, SuperValu needs to add depreciation and amortization back to net income to adjust net income to net cash flow from operating activities. b. Impairment charges are recorded when the company determines that the carrying value of an asset is greater than that asset’s fair value. If an asset has changed from the time of acquisition, or if business conditions have changed the effectiveness of that asset, the company will determine that the asset is overvalued. The charge is added back to net income for the same reason SuperValu added back depreciation and amortization. That is, recording the impairment expense reduces net income but has no effect on cash. c. The “gain on the sale of assets” is subtracted from net earnings and “loss on sale” is added back because both of these items are non­recurring in nature and so the intent is to eliminate these from the calculation of cash from operating activities. (The cash flow related to the sale of assets belongs in the Investing section.) To reverse these out from net income, they have to be offset by the opposite of how they affect net income on the income statement. Therefore losses are added back and gains are subtracted away. d. Receivables have been a consistent source of cash for SuperValu. The change in accounts receivable has been a decline each year, which is freeing up the company’s cash. Less receivables (as compared to the prior year) indicate more cash flowing into the company. Inventory, on the other hand, grew in 2008 and 2009, using up company cash balances. Of greater impact on the company’s cash position has been the reduction of accounts payables, draining cash from SuperValu. e. One of the first tipoffs that there may be some problems with the quality of earnings is if cash provided by operating activities is lower than net income. This is not the case with SuperValu and so there is no indication that earnings are being managed by the timing of tr...
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