Kunci Jawaban Analisis Laporan Keuangan Bab 7

Chapter 07 - Cash Flow Analysis
Chapter 7
Cash Flow Analysis
REVIEW
Cash is the residual of cash inflows less cash outflows for all prior periods of a
company. Net cash flows, or simply cash flows, refer to the current period s cash inflows
less cash outflows. Cash flows are different from accrual measures of performance.
Cash flow measures reco!ni"e inflows when cash is recei#ed not necessarily earned, and
outflows when cash is paid not necessarily incurred. $he statement of cash flows
reports cash flow measures for three primary %usiness acti#ities& operatin!, in#estin!,
and financin!. 'peratin! cash flows, or cash flows from operations, is the cash %asis
counterpart to accrual net income. Information on cash flows helps us assess a
company s a%ility to meet o%li!ations, pay di#idends, increase capacity, and raise
financin!. It also helps us assess the (uality of earnin!s and the dependence of income
on estimates and assumptions re!ardin! future cash flows. $his chapter descri%es cash
flows and their rele#ance to our analysis of financial statements. We descri%e current
reportin! re(uirements and their implications for our analysis of cash flows. We e)plain
useful analytical ad*ustments to cash flows usin! financial data to impro#e our analysis.
We direct special attention to transaction reconstruction, $+account, and con#ersion
analyses.
7-1
' $-INE
• tatement of Cash Flows

Rele#ance of Cash
Reportin! %y Acti#ities
Constructin! the Cash Flow tatement
pecial $opics
• Reportin! Cash Flows from 'perations Indirect /ethod
0irect /ethod
Con#ertin! from Indirect to 0irect /ethod
Ad*ustments to Cash Flow Components
Additional 0isclosures and Ad*ustments
• Analysis Implications of Cash Flows -imitations in Cash Flow Reportin!
Interpretin! Cash Flows and Net Income
Alternati#e Cash Flow /easures
Company and Economic Conditions
Free Cash Flow
Cash Flows as Validators
• peciali"ed Cash Flow Ratios
Cash Flow Ade(uacy Ratio
Cash Rein#estment Ratio
• Appendi) 7A Analytical Cash Flow Wor1sheets
7-2
ANA-2 I '34EC$IVE
• E)plain the rele#ance of cash flows in analy"in! %usiness acti#ities.
• 0escri%e reportin! of cash flows %y %usiness acti#ities.
• 0escri%e the preparation and analysis of the statement of cash flows.
• Interpret cash flows from operatin! acti#ities.
• Analy"e cash flows under alternati#e company and %usiness conditions.
• 0escri%e alternati#e measures of cash flows and their usefulness.
• Illustrate an analytical tool in e#aluatin! cash flows 5Appendi) 7A6.
7-3
E $I'N
8. $he term cash flow was pro%a%ly first coined %y analysts. $hey reco!ni"ed that the
accrual system of income measurement permits the introduction of a #ariety of alternati#e
accountin! treatments and conse(uent distortions. $he crude concept of cash flow9net income
plus ma*or noncash e)penses 5such as depreciation69was deri#ed to %ypass these distortions
and %rin! income measurement closer to the discipline of actual cash flows. $his cash flow
measure, still a popular surro!ate for cash from operations 5CF'6, is crude %ecause it falls short of
relia%ly appro)imatin! in most cases the correct measure of CF'.
Confusion with the term cash flow deri#es from se#eral sources. 'ne source of
confusion stems from the initial and incorrect computation of the crude measure of
cash flow as income plus ma*or noncash e)penses. $he fi!ure fails to reflect actual
cash flows. Another and more serious confusion arises from the assertion %y some,
and particularly %y mana!ers dissatisfied %y the le#el of their reported net income,
that cash flow is a measure of performance superior to or more #alid than net
income. $his assertion implicitly assumes that depreciation, and other noncash
costs, are not !enuine e)penses. E)perience shows that only net income is properly
re!arded as a measure of performance and can %e related to the e(uity in#estment as
an indicator of operatin! performance. If we add %ac1 depreciation to net income and
compute the resultin! return on in#estment, we are, in effect, confusin! the return on
in#estment with an element of return on in#estment in fi)ed assets.
: While fra!mentary information on the sources and uses of cash can %e o%tained from
comparati#e %alance sheets and from income statements, a comprehensi#e picture of this
important area of acti#ity can %e !ained only from a statement of cash flows 5 CF6. $he CF
pro#ides information to help answer (uestions such as&
• What amount of cash is !enerated %y operations;
• What utili"ation is made of cash pro#ided %y operations;
• What is the source of cash in#ested in new plant and e(uipment;
• What use is made of cash from a new %ond issue or the issuance of common stoc1;
• <ow is it possi%le to continue the re!ular di#idend in the face of an operatin! loss;
• <ow is de%t repayment achie#ed;

• What is the source of cash used to redeem the preferred stoc1;
• <ow is the increase in in#estments financed;
• Why, despite record profits, is the cash position lower than last year;
3. SFAS 95 re(uires that the statement of cash flows classify cash receipts and cash
payments %y operatin!, financin! and in#estin! acti#ities.
Operating activities encompass all the earnin!+related acti#ities of the enterprise. $hey
encompass, in addition to all the income and e)pense items found on the income
statement, all the net inflows and outflows of cash that operations impose on the
enterprise. uch operations include acti#ities such as the e)tension of credit to
customers, in#estment in in#entories, and o%tainin! credit from suppliers. $his means
operatin! acti#ities relate to all items in the statement of income 5with minor
7-4
e)ceptions6 as well as to %alance sheet items that relate to operations mostly wor1in!
capital accounts such as accounts recei#a%le, in#entories, prepayments, accounts
paya%le, and
7-5
accruals. SFAS 95 also specifies that operatin! acti#ities include all transactions and
e#ents that are not of an in#estin! or financin! nature.
Financing activities include o%tainin! resources from owners and pro#idin! them with a
return of or a return on 5di#idends6 their in#estment. $hey also include o%tainin!
resources from creditors and repayin! the amounts %orrowed or otherwise settlin! the o
%li!ations.
Investing activities include ac(uirin! and sellin! or otherwise disposin! of %oth securities
that are not cash e(ui#alents and producti#e assets that are e)pected to !enerate
re#enues o#er the lon!+term. $hey also include lendin! money and collectin! on such
loans.
= We can distin!uish amon! three cate!ories of ad*ustments that con#ert accrual %asis net
income to cash from operations& 5i6 E)penses, losses, re#enues, and !ains that do not use or !
enerate cash such as those in#ol#in! noncash accounts 5e)cept those in ii6, 5ii6 Net chan!es in
noncash accounts 5mostly in the operatin! wor1in! capital !roup6 that relate to operations9these
modify the accrual+%ased re#enue and e)pense items included in income, 5iii6 >ains and losses
5such as on sales of assets6 that are transferred to other sections of the CF so as to show the
entire cash proceeds of the sale.
? $he two methods of reportin! cash flow from operations are&

Indirect Method& nder this method net income is ad*usted for noncash items re(uired to
con#ert it to CF'. $he ad#anta!e of this method is that it is a reconciliation that discloses
the differences %etween net income and CF'. ome analysts estimate future cash flows
%y first estimatin! future income le#els and then ad*ustin! these for leads and la!s
%etween income and CF' 5that is, noncash ad*ustments6.
Direct (or Inflow-O tflow! Method& $his method lists the !ross cash receipts and dis
%ursements related to operations. /ost respondents to the E)posure 0raft that preceded
SFAS 95 preferred this method %ecause this presentation discloses the total amount of
cash that flows into the enterprise and out of the enterprise due to operations. $his !i#es
analysts a %etter measure of the si"e of cash inflows and outflows o#er which mana!
ement has some de!ree of discretion. As the ris1s that lenders are e)posed to relate
more to fluctuations in CF' than to fluctuations in net income, information on the
amounts of operatin! cash receipts and payments is important in assessin! the nature of
those fluctuations.
@ $he function of the income statement is to measure the profita%ility of the enterprise for a !
i#en period. $his is done %y matchin! e)penses and losses with the re#enues and !ains earned. While
no other statement measures profita%ility as well as the income statement, it does not show the timin!
of cash flows and the effect of operations on li(uidity and sol#ency. $he latter is reported on %y the
CF. Cash from operations 5CF'6 reflects a %roader concept of operations relati#e to net income. It
encompasses all earnin!+related acti#ities of the enterprise. CF' is concerned not only with e)penses
and re#enues %ut also with the cash demands of these acti#ities, such as in#estments in customer
recei#a%les and in in#entories as well as the financin! pro#ided %y suppliers of !oods and ser#ices.
CF' focuses on the li(uidity aspect of operations and is not a measure of profita%ility %ecause it does
not include important costs such as the use of lon!+li#ed assets in operations or important
7-6
re#enues such as the e(uity in the earnin!s of nonconsolidated su%sidiaries or

affiliates.
7-7
7. $he CF sheds li!ht on 5i6 the effects of earnin! acti#ities on cash resources, 5ii6 what
assets are ac(uired, and 5iii6 how assets are financed. It also can hi!hli!ht more clearly the
distinction %etween net income and cash pro#ided %y operations. $he a%ility of an enterprise to !
enerate cash from operations on a consistent %asis is an important indicator of financial health.
No %usiness can sur#i#e o#er the lon! run without !eneratin! cash from its operations. <owe#er,
the interpretation of CF' fi!ures and trends must %e made with care and with a full understandin!
of all surroundin! circumstances.
rosperous as well as failin! entities can find themsel#es una%le to !enerate cash
from operations at any !i#en time, %ut for different reasons. $he entity cau!ht in the
Bprosperity s(uee"eB of ha#in! to in#est its cash in recei#a%les and in#entories to
meet e#er+increasin! customer demand will often find that its profita%ility will
facilitate financin! %y e(uity as well as %y de%t. $hat same profita%ility should
ultimately turn CF' into a positi#e fi!ure. $he unsuccessful firm, on the other hand,
will find its cash drained %y slowdowns in recei#a%le and in#entory turno#ers, %y
operatin! losses, or %y a com%ination of these factors. $hese conditions usually
contain the seeds of further losses and cash drains and also can lead to difficulties
in o%tainin! trade credit. In such cases, a lac1 of CF' has different implications. $he
unsuccessful or financially pressed firm can increase its CF' %y reducin! accounts
recei#a%le and in#entories, %ut usually this is done at the e)pense of ser#ices to
customers that can further depress future profita%ility. E#en if the unsuccessful firm
mana!es to %orrow, the costs of %orrowin! only ma!nify the ultimate drains of its
cash. $hus, profita%ility is a 1ey consideration, and while it does not insure CF' in
the short run, it is essential to a healthy financial condition in the lon! run.
Chan!es in operatin! wor1in! capital items must %e similarly interpreted in li!ht of

attendin! circumstances. An increase in recei#a%les can mean e)pandin! consumer
demand for enterprise products or it can mean an ina%ility to collect amounts due in
a timely fashion. imilarly, an increase in in#entories 5and particularly of the raw
material component6 can imply preparations for an increase in production in
response to consumer demand. It also can imply 5particularly if the finished !oods
component of in#entories is increasin!6 an ina%ility to sell due to, say, when
anticipated demand did not materiali"e.
. A #alua%le analytical deri#ati#e of the CF is Bfree cash flow.B As with any other
analytical measure, analysts must pay careful attention to components of this
computation. <ere, as in the case of any cash flow measures, ulterior moti#es may
sometimes affect the #alidity of the computation. 'ne of the analytically most useful
computations of free cash flow is&
Cash from 'perations 5CF'6

+ Capital e)penditures re(uired to maintain producti#e capacity used in !eneratin! income
+ 0i#idends 5on preferred stoc1 and maintenance of desired payout on common stoc16
D Free Cash Flow 5FCF6
7-8
ositi#e FCF implies that this is the amount a#aila%le for company purposes after
pro#isions for financin! outlays and e)penditures to maintain producti#e capacity at
current le#els. Internal !rowth and financial fle)i%ility depend on an ade(uate amount
of FCF. Note that the amount of capital e)penditures needed to maintain producti#e
capacity at current le#els is !enerally not disclosed %y companies. It is included in
total capital e)penditures, which also can include outlays for e)pansion of producti#e
capacity. 3rea1in! down capital e)penditures %etween these two components is
difficult. $he FA 3 considered this issue, %ut in SFAS 95 it decided not to re(uire
classification of in#estment e)penditures into maintenance and e)pansion cate!ories.
. For financial statement analysis, the CF pro#ides clues to important matters such as&
• Feasi%ility of financin! capital e)penditures and possi%le sources of such financin!.

• ources of cash to finance an e)pansion in the %usiness.
• 0ependence of the firm on e)ternal sources of financin! 5such as de%t or e(uity6.
• Future di#idend policies.
• A%ility to meet future de%t ser#ice re(uirements.
• Financial fle)i%ility, that is, the firm s a%ility to !enerate sufficient cash so as to
respond to unanticipated needs and opportunities.
• Insi!ht into the financial ha%its of mana!ement and indications of future policies.
• i!nals re!ardin! the (uality of earnin!s.
7-9
E ERCI E
E)ercise 7+8 5:G minutes6
$he 2ear 88 CF' of Camp%ell is hi!her 5%y H=G .7 million6 than its 2ear 88 net
income for two main reasons&
8. ome items decreased net income %ut did not use cash9specifically&
a. 0epreciation and amorti"ation are e)penses not re(uirin! a cash outlay 5H:G .@6.
%. 0eferred income ta)es are an e)pense that has no present cash payment
5H ?.?6.
c. e#eral char!es and e)penses did not re(uire outlays of cash 5H@ .:6.
d. A decrease in in#entory implies that cost of sales are char!ed %y reducin!
in#entory le#els rather than %y ma1in! cash payments of H= .7.
: ome items !enerated operatin! cash inflow did not enter into the determination of
net income9specifically&
a. $he decrease in accounts recei#a%le means that cash is collected %eyond the
amounts reco!ni"ed as sales re#enue in the income statement 5H87.86.
%. $here are se#eral other items that had a similar effect, amountin! to H G.@.
E)ercise 7+: 5=G minutes6
a. SFAS 95 re(uires that the CF classify cash receipts and payments %y operatin!,
financin!, and in#estin! acti#ities.
("! Operating activities encompass all the earnin!+related acti#ities of the
enterprise. $hey encompass, in addition to all the income and e)pense items
found on the income statement, all the net inflows and outflows of cash that
operations impose on the enterprise. uch operations include acti#ities such as
the e)tension of credit to customers, in#estment in in#entories, and o%tainin!
credit from suppliers. $his means operatin! acti#ities relate to all items in the
statement of income 5with minor e)ceptions6 as well as to %alance sheet items
that relate to operations mostly wor1in! capital accounts such as accounts
recei#a%le, in#entories, prepayments, accounts paya%le, and accruals. SFAS
95 also specifies that operatin! acti#ities include all transactions and e#ents
that are not of an in#estin! or financin! nature.
(#! Financing activities include o%tainin! resources from owners and pro#idin!
them with a return of or a return on 5di#idends6 their in#estment. $hey also
include o%tainin! resources from creditors and repayin! the amounts
%orrowed or otherwise settlin! the o%li!ations.
(3! Investing activities include ac(uirin! and sellin! or otherwise disposin! of
%oth securities that are not cash e(ui#alents and producti#e assets that are
e)pected to !enerate re#enues o#er the lon!+term. $hey also include lendin!
money and collectin! on such loans.
7-10
E)ercise 7+:9concluded
% SFAS 95 re(uires that all si!nificant financin! and in#estin! acti#ities %e disclosed.
For e)ample, noncash transactions that include the con#ersion of de%t to e(uity, the
ac(uisition of assets throu!h the issuance of de%t, and e)chan!es of assets or lia%ilities,
should %e disclosed in a separate schedule of noncash in#estin! and financin! acti#ities.
c. 586 Net income is the startin! point of the computation of CF'. SFAS 95 does
not re(uire the separate disclosure of e)traordinary items in the CF.
5:6 0epreciation is added %ac1 as an e)pense not re(uirin! cash.
5 6 $he write+off of uncollecti%le recei#a%les does not affect cash. imilarly, the
%ad de%t e)pense does not re(uire an outlay of cash. ince this corporation
uses the indirect method for presentation of CF', no additional ad*ustment
is needed %eyond the ad*ustment for the chan!e in the net accounts recei#a
%le, which includes the credit to the allowance for dou%tful accounts.
5=6 $he H8=G,GGG increase in accounts recei#a%le means that some sales
ha#e not %een collected in cash and, accordin!ly, net income is reduced %y
H8=G,GGG in arri#in! at CF'. $he H@G,GGG decline in in#entories means
that cost of !oods sold includes in#entories paid for in prior years, and did
not re(uire cash this year. As such, net income is increased %y H@G,GGG
in arri#in! at CF'.
5?6 $his H G,GGG is an e)pense re(uirin! cash9no ad*ustment is called for. $his
amount also must %e disclosed as part of the supplemental disclosures.
5@6 A reconstructed analytical entry would appear as&

Cash............................................... G,GGG
Accumulated 0epreciation.......... ?G,GGG
E................................................ 7?,GGG
>ain on sale of machine.............. ?,GGG
$he H G,GGG increase in cash is shown as a source from in#estin!
acti#ities. $he H?,GGG !ain is deducted from 5remo#ed from6 net income so
that the entire proceeds of the sale are shown as part of in#estment
acti#ities.
576 'nly the cash payment of H8GG,GGG is shown in the CF as an in#estin!
acti#ity outflow. In a separate schedule, the purchase of %uildin!s and land
for noncash considerations is detailed.
5 6 $his is a noncash transaction that is disclosed in a separate schedule of

noncash in#estin! and financin! acti#ities.
5 6 $he declaration of a cash di#idend creates a current lia%ility. 0urin! 2ear ,
no cash outflow occurs and there is nothin! to report on the 2ear CF.
58G6$his e#ent has no effect on cash nor need it %e reported in con*unction
with the CF.
7-11
E)ercise 7+ 5 G minutes6
a. Cash Flows from 'perations Computation&

Net income..................................................................... H8G,GGG
Add 5deduct6 items to con#ert to cash %asis&
0epreciation, depletion, and amorti"ation............ H ,GGG
0eferred income ta)es............................................. =GG
Amorti"ation of %ond discount............................... ?G
Increase in accounts paya%le.................................. 8,:GG
0ecrease in in#entories........................................... ?G 8G,?GG
H:G,?GG
ndistri%uted earnin!s of unconsolidated
su%sidiaries and affiliates...................................... 5:GG6
Amorti"ation of premium on %onds paya%le......... 5@G6
Increase in accounts recei#a%le............................. 5 GG6 58,8@G6
Cash pro#ided %y operations ..................................... H8 , =G
% 586 $he issuance of treasury stoc1 for employee stoc1 plans 5as compensation6
re(uires an add%ac1 to net income %ecause it is an e)pense not usin! cash.
5:6 $he cash outflow for interest is not included in e)pense and must %e
included as cash outflow in in#estin! acti#ities 5as part of outlays for
property.6
5 6 If the difference %etween pension e)pense and actual fundin! is an accrued

lia%ility, the unpaid portion must %e added %ac1 to income as an e)pense
not re(uirin! cash. If the amount funded e)ceeds pension e)pense, then net
income must %e reduced %y that e)cess amount.
7-12
E)ercise 7+= 5 G minutes6
a. 3e!innin! %alance of accounts recei#a%le......... H G?,GGG

Net sales............................................... 8, 7,GGG
$otal potential receipts......................................... H:,:=:,GGG
Endin! %alance of accounts recei#a%le.............. + : ?,GGG
Cash collected from sales.................................... H8, =7,GGG
%. Endin! %alance of in#entory................................. H ?= ,GGG

Cost of sales.......................................................... J8,8?G,GGG
$otal............................................... H8,@ ,GGG
3e!innin! %alance of in#entory........................... + = 8,GGG
urchases............................................................... H8,:@ ,GGG
3e!innin! %alance of accounts paya%le............. H ?@ ,GGG
urchases 5from a%o#e6........................................ 8,:@ ,GGG
$otal potential payments...................................... H8, 8,GGG
Endin! %alance of accounts paya%le.................. + @G=,GGG
Cash payments for accounts paya%le................. H8,::7,GGG
c. Issuance of common stoc1................................... H 8,GGG

Issuance of treasury stoc1................................... 87,GGG
$otal nonoperatin! cash receipts........................ H ,GGG
d. Increase in land...................................................... H 8?G,GGG

Increase in plant and e(uipment.......................... 8 ,GGG
$otal payments for noncurrent assets................ H 8@ ,GGG
E)ercise 7+? 5:G minutes6
So rce $se Ad% st&ent 'ategor

a. '
%. F
c. F
d. I
e. F
f. NCN
!. I
h. NC
i. F
*. '
7-13
E)ercise 7+@ 5:G minutes6

So rce $se Ad% st&ent 'ategor
a. '
%. F
c. NCN
d. I
e. NC
f. NCN
!. I
h. NC
i. NE
*. NE
E)ercise 7+7 5 G minutes6
)et 'ash fro& 'ash

Inco&e operations position
8. NE NE J
:. NE NE J
.J J J
=a. + NE NE
=%. NE586 J5:6 J5:6
=c. + J5:6 J5:6
?. NE J J
@. + J 5lon!+run +6 J 5lon!+run +6
7. + +5?6 J
.J NE NE
. J5 6 J5=6 J5=6
8G. NE J J
88. J J J
8:. NE NE J
8. NE NE J
586 0eferred ta) accountin!.
5:6
0epends on whether ta) sa#in!s are reali"ed in cash.
56
If profita%le.
5=6
If accounts recei#a%le collected.
5?6
0epends on whether interest is paid or accrued.
Further e)planations 5listed %y proposal num%er6&
8. u%stitutin! payment in stoc1 for payment in cash for its di#idends will not affect income or CF'
%ut will increase cash position.
: In the short run, postponement of capital e)penditures will sa#e cash %ut ha#e no effect on income or
CF'. In the lon! term, %oth income and CF' may suffer due to lower operatin! efficiency.
7-14
E)ercise 7+79continued
. Cash not spent on repair and maintenance will increase all three measures. <owe#er, the
s1impin! on necessary discretionary costs will ad#ersely impact future operatin! efficiency and,
hence, profita%ility.
= /ana!ers ad#ocatin! an increase in depreciation may ha#e spo1en in the mista1en %elief that
depreciation is a source of cash and that conse(uently increasin! it would result in a hi!her cash inflow. In fact,
the le#el of depreciation e)pense has no effect on cash flow9the same amount of depreciation deducted in
arri#in! at net income is added %ac1 in arri#in! at CF'. 'n the other hand, increasin! depreciation for ta)
purposes will in all cases result in at least
a short+term sa#in!s.
? uic1er collections will not affect income %ut will increase CF' %ecause of lower accounts recei#a
%le. Cash will also increase %y the speedier con#ersion of recei#a%les into cash. In the lon!er run this
stiffenin! in the terms of sale to customers may result in sales lost to
competition.
@ ayments stretched+out will lower income %ecause of lost discounts %ut does positi#ely affect CF'
%y increasin! the le#el of accounts paya%le. Cash conser#ation will result in a hi!her cash position. Relations
with suppliers may %e affected ad#ersely. Note& -on!+term
cash outflow will %e hi!her %ecause of the lost discount.
7. 3orrowin! will result in interest costs that will decrease income and CF'. Cash position will
increase.
. $his chan!e in depreciation method will increase income in the early sta!es of an asset s life.
$he opposite may hold true in the later sta!es of the asset s life.
. In the short term, hi!her sales to dealers will result in hi!her profits 5assumin! we sell a%o#e
costs6 and, if they pay promptly, %oth CF' and cash will increase. <owe#er, unless the dealers
are a%le to sell to consumers, such sales will %e made at the e)pense of future sales.
8G. $his will lead to less income from pension assets in the future which could cause future
pension e)pense to increase.
88. $he cost of fundin! in#entory will %e reduced in the future. In the current period net income may
also %e increased %y a -IF' li(uidation from reduced in#entory le#els.
8:. $he current period decline in the #alue of the tradin! securities has %een reflected in current
period income, as has the pre#ious !ain. Althou!h the sale will increase cash, it will ha#e no
effect on current period income. If the current period decline is deemed to %e temporary, the
company is sellin! a potentially profita%le security for a short+term cash !ain.
8 . Reissuance of treasury shares will increase cash, %ut will ha#e no effect on current period
income as any K!ainL or KlossL is reflected in additional paid in capital, not income. If the stoc1
price is considered to %e temporarily depressed, the company is fore!oin! a future sale at a !
reater mar1et price and is, thus, sufferin! current dilution of shareholder #alue.
7-15
E)ercise 7+ 5:G minutes6
a. 0epreciation is neither a source nor a use of cash. Instead, depreciation is an

allocation of the cost of an asset o#er its useful life.
% A ma*or cause of the %elief that depreciation is a source of cash is the Badd %ac1B
presentation in the CF prepared usin! the indirect format. $his presentation adds
depreciation to net income and !i#es the erroneous impression that it increases cash from
operations.
c. $here is one sense in which depreciation is a source of cash, and for this reason we
must not overemphasi"e the idea that depreciation is not a source of cash. Namely, when
sellin! prices are sufficient to reco#er the depreciation e)pense allocated to products sold,
then re#enues do pro#ide mana!ement with a discretionary, e#en if temporary, inflow of
cash 5assumin! no si!nificant chan!e in operatin! wor1in! capital6. Normally, mana!ement
will ha#e to in#est this cash in fi)ed assets replacements to continue in %usiness on a lon!
+term %asis. <owe#er, in the e#ent of a financial crisis or cash shortfall, mana!ement has
the option of di#ertin! such cash to uses that will a#ert a li(uidity crisis. $his is the one
e)ception that may allow one to re!ard depreciation as a temporary Ksource of cash.L
7-16
E)ercise 7+ 5@G minutes6
a. Cash Collections Computation&

Accounts Recei#a%le 5Net6
3e! Ma ?@=.8
ales M8 @:G?. @8=?.= Cash collections M%
End M @:=.?
Notes&
Ma 3alance at 7O: O2ear 8G............................................ H@:=.? M
-ess& increase in 2ear 8G...................................... ..5@G .=6 M@8
H?@=.8
M% $his amount is o#erstated %y the pro#ision for dou%tful accounts e)pense that is included in
another e)pense cate!ory.
%. Cash 0i#idends aid Computation&
0i#idends aya%le
0i#idend paid M77 8 7.? :. 3e! M=

8=:.: 0i#idend declared Ma M
7.G End M=
Note Ma & Item M represents di#idends declared, not di#idends paid 5see also Item M77 6.
c. Cost of >oods and er#ices roduced Computation& In#entories
3e! M = 8. =G ?.? Cost of products sold M8=

Amount to %alance :.=
End M = 7G@.7
d. $he entry for the income ta) pro#ision for 2ear 88 is&
Income ta) e)pense M:7 ....................................... :@?.
0eferred income ta) 5current6 plu!................. 8:.8
Income ta) paya%le.............................................. : G.=
0eferred income ta) 5noncurrent6 Ma .............. : .=
Notes&
586 $he entry increases current lia%ilities %y H8:.8 since deferred income ta) 5current6 is
credited %y this amount. It also increases current lia%ilities %y H: G.= M8:=A , the amount of
income ta)es paya%le.
5:6 $he Ma is the difference in the %alance of the noncurrent deferred income ta) item M87@ D
H:? .? + H: ?.8 D H: .=.
5 6 Also, H: .= J H8:.8 D H ?.?, which is total deferred ta) M? or M8:7A
7-17
E)ercise 7+ 9continued
e. 0epreciation e)pense has no effect on cash from operations. $he credit, when
recordin! the depreciation e)pense, !oes to accumulated depreciation, a noncash account.
f. $hese pro#isions are added %ac1 %ecause they affect only noncash accounts, the
char!e to earnin!s must %e remo#ed in con#ertin! it to the cash %asis.
! $he KEffect of e)chan!e rate chan!es on cashL represents translation ad*ustments

5differences6 arisin! from the translation of cash from forei!n currencies to the . . dollar.
h. Any !ain or loss is reported under Bother, netB9Item M@G .
i. Free cash flows D

Cash flow from operations P Cash used for capital additions P 0i#idends
paid
2ear 88& H G?.: P H @8.8 P H8 7.? D H G@.@
2ear 8G& H== .= P H 7.@ P H8:=. D H5@ .?6
2ear & H ?7. P H: =.8 P H @.7 D H58 .?6
*. tart+up companies usually ha#e !reater capital addition re(uirements and lower
cash inflows from operations. Also, start+ups rarely pay cash di#idends. Free
cash flow earned %y start+up companies is usually used to fund the !rowth of
the company, especially if successful.
1. 0urin! the launch of a new product line, the statement of cash flows can %e affected
in se#eral ways. First, cash flow from operations is lower %ecause su%stantial ad#ertisin!
and promotion is re(uired and sales !rowth has not yet %een ma)imi"ed. econd, su%stantial
capital additions are usually necessary to pro#ide the infrastructure for the new product
line. $hird, cash flow from financin! can %e affected if financin! is o%tained to launch this
new product line.
7-18
E)ercise 7+8G 58? minutes6
a. Re#enues are, in certain instances, reco!ni"ed %efore cash is recei#ed 5that is,
when earned6. E)penses are, in certain instances, reco!ni"ed after cash is paid 5that is,
matched with re#enues6. As a result, net income can %e positi#e when operatin! cash flows
are ne!ati#e. Consider some e)amples& 586 If accounts recei#a%le increase su%stantially
durin! the year, this implies that re#enues outpaced cash collections. 5:6 If a company
%uilds up its in#entory le#els su%stantially, then cash is paid out %ut no e)pense is reco!
ni"ed. 5 6 If the company reduces its accounts paya%le %alances su%stantially durin! the
year, then cash flows can %e ne!ati#e when net income is positi#e.
% 'peratin! cash flows can ser#e as one indicator of earnin!s (uality %ecause o#er a
num%er of years, cash flows should appro)imate earnin!s. If cash flows from operations are
consistently lower than earnin!s, it is possi%le that the reported earnin!s are not of hi!h
(uality. 5As with any %road !uideline, one must loo1 for corro%oratin! e#idence.6
E)ercise 7+88 58? minutes6
a. 0urin! the !rowth sta!e, a company in#ests hea#ily in infrastructure !rowth and into
ad#ertisin! and promotion. As the company transitions into the Kcash cowL sta!e, the
company reduces the in#estment in %oth infrastructure !rowth and ad#ertisin! and
promotional acti#ities. $his transition would %e manifested in the statement of cash flows
%y increased operatin! cash flows 5less cash outflows for ad#ertisin! and promotion, hi!her
mar!ins, so forth6 and decreased use of cash for in#estin! acti#ities.
% $he decline of a Kcash cowL would %e reflected in the statement of cash flows %y
declinin! cash flows from operations. $he declinin! operatin! cash flows will result from
declinin! sales of the fadin! Kcash cowL products.
7-19
R'3-E/
ro%lem 7+8 5@G minutes6
W'RQ <EE$ $' C'/ $E CA < F-'W FR'/ ' ERA$I'N 5IN /I--I'N 6 0IREC$ 5INF-'W+' $F-'W6 RE EN$A$I'N CA/ 3E-- '
9 2EAR EN0E0 4 -2 : , 2EAR 88
Ref. Reported Ad*ust. Re#ised

Cash Receipts from 'perations
Net ales.......................................................... 8 H@,:G=.8 H7.? H@,:88.@
'ther re#enue and income............................. 8 :@.G C :@.G
5I6 0 in current recei#a%les............................. @8 87.8 C 87.8
5I6 0 in noncurrent recei#a%les......................
D CA < C'--EC$I'N ................................ H@,:=7.: H7.? H@,:?=.7
Cash 0is%ursements for 'perations

$otal e)penses 5include min. int. ta)es6 a H?, 8.G H7.? H?, .?
-ess& E)penses losses not usin! cash&
+ 0epreciation and amorti"ation..................... ?7 5:G .@6 5:G .@6
+ Noncurrent deferred income ta)es............. ? 5 ?.?6 5 ?.?6
+ 'ther, net....................................................... @G 5@ .:6 5@ .:6
Chan!e in Current Assets and -ia%ilities

related to 'perations
I 506 in in#entories......................................... @: H 5= .76 H 5= .76
I 506 in prepaid e)penses............................. ? 5:?. 6 5:?. 6
5I6 0 in accounts paya%le.............................. =8 =:. =:.
5I6 0 in ta)es paya%le.................................... == 5:8. 6 5:8. 6
5I6 0 in accruals, payrolls, etc. %................... 87? 5:@. 6 5:@. 6
I or 0 in noncurrent accounts c.................... ?. G.G ?.
D CA < 0I 3 R E/EN$ ............................. H?,=?G.: H7.? H?,=?7.7
0i#idends Recei#ed
E(uity in income of
unconsolidated affiliates.............................. := :.= :.=
0istri%utions %eyond e(uity
in income of affiliates c................................. ?. G.G ?.
D 0i#idends from unconsol. affiliates............ 8@ A H .: HG.G H .:
CA < F-'W FR'/ ' ERA$I'N ................ H G?.: HG.G H G?.:
a $otal costs and e)penses M::A J $a)es on earnin!s M:7 J /inority interests M:? J
Interest income M8 D H?,? 8. J H:@?. J H7.: J H:@.G D H?, 8
% It is assumed that accruals, payrolls, etc., are part of item M87? .
c A reconcilin! amount to tie in with the H .: di#idends from affiliates 5item 8@ A6 #ersus
e(uity in earnin!s of affiliates 5item :=6.
7-20
ro%lem 7+: 57? minutes6
a.
W'RQ <EE$ $' C'/ $E CA < F-'W FR'/ ' ERA$I'N 5IN /I--I'N 6 0IREC$ 5INF-'W+' $F-'W6 RE EN$A$I'N CA/ 3E-- '
2EAR EN0E0 4 -2 : , 2EAR 8G
Ref. Reported Ad*ust. Re#ised

Net ales.......................................................... 8 H@,:G?. H7.? H@,:8 .
'ther re#enue and income&
5I6 0 in current recei#a%les............................. @8 5@G.=6 5@G.=6
5I6 0 in noncurrent recei#a%les
Effect of translation ad*ustments ............... G.G G.G G.G
D Cash Collections.......................................... H@,8=?.= H7.? H@,8?:.

$otal e)penses 5include interest
ta)es6 M::A J M:7 J M:? ............................... H@,:8=. H7.? H@,:::.=
-ess& E)penses -osses not usin! cash
+ 0epreciation amorti"ation........................ ?7 5:GG. 6 5:GG. 6
+ Noncurrent deferred income ta)es............. ? 5.6 5.6
+ 'ther pro#ision for restructurin!
and writedowns............................................. ? 5 .86 5 .86
+ 'ther S........................................................... @G 5:=.76 5:=.76
+ 'ther
Chan!es in Current Assets and -ia%ilities
related to operations
I 506 in in#entories......................................... @: 58G.76 58G.76
I 506 in prepaid e)pense...............................
5I6 0 in accounts paya%le..............................
5I6 0 in ta)es paya%le....................................
5I6 0 in accruals, payrolls, etc......................
5I6 0 in di#idends paya%le.............................
I or 0 other SS................................................. @ @. @.
I or 0 in noncurrent amounts....................... G.G G.G G.G
D Cash 0is%ursements............................ H?,7G=.= H7.? H?,788.
0i#idends Recei#ed
E(uity in income of unconsolidated
affiliates......................................................... := 8 .? 8 .?
+ ndistri%uted e(uity in income of
affiliates......................................................... 8@ A 5@.86 G.G 5@.86
D 0i#idends from unconsol. affils.................. 7.= 7.=
Cash Flow From 'perations.......................... H == .= H == .=
S 'ther, net M@G H8 .@ J M8@ A H@.8 D H:=.7
SS Camp%ell shows a com%ined fi!ure instead of details of operatin! assets and lia%ilities.
7-21
ro%lem 7+ 57? minutes6

a.
Tett Company
tatement of Cash Flows
For the 2ear Ended 0ecem%er 8, 2ear :
Cash flows from operatin! acti#ities
Net Income.............................................................. H7,GGG
Add 5deduct6 items to con#ert to cash %asis
0epreciation....................................................... ?,GGG
-oss on sale of fi)ed assets............................. 8,GGG
>ain on sale of in#estment............................... 5 ,GGG6
0ecrease in in#entory........................................ :,GGG
Increase in recei#a%les..................................... 5?,GGG6
0ecrease in accounts paya%les....................... 57,GGG6
Net cash pro#ided from operatin! acti#ities G
Cash flows from in#estin! acti#ities

ale of fi)ed assets............................................... @,GGG
ale of in#estments............................................... ,GGG
urchase of fi)ed assets...................................... 5=,GGG6
Net cash pro#ided from in#estin! acti#ities 88,GGG
Cash flows from financin! acti#ities

ale of unissued common stoc1.......................... 8,GGG
urchase of treasury stoc1................................... 588,?GG6
Net cash used %y financin! acti#ities.................. 58G,?GG6
Net Increase in cash.............................................. ?GG
S pple&ental disclos re of 'ash Flow infor&ation

Cash paid durin! the year for&
Interest................................................................................ =,GGG
Income ta)es...................................................................... @,GGG
Sched le of noncash investing and financing activities &
Ac(uisition of fi)ed assets %y issue of %onds..................... G,GGG
Con#ersion of %onds into common stoc1............................ 8G,GGG
7-22
ro%lem 7+ 9continued
%.
Tett Company
Comparison of Accrual and Cash Reportin!
Inco&e State&ent 'ash fro& operations
ales........................................... H7G,GGG H@?,GGG Collection from
customers
>ain on sale of in#estments.... ,GGG 5a6
H7 ,GGG H@?,GGG
urchases.................................. 5=G,GGG6 5=7,GGG6 ayments to

suppliers 5%6
0ecrease in in#entory............... 5:,GGG6 9
0epreciation............................... 5?,GGG6 5c6
E)penses paid........................... 58 ,GGG6 58 ,GGG6
-oss on sale of fi)ed assets.... 58,GGG6 5d6
Net income................................. H 7,GGG
Cash from operations............... H G
Notes&
5a6 'mitted %ecause it is lin1ed with proceeds from sale of in#estments 5in#estin!
acti#ities6.
5%6 urchase of H=G,GGG J 0ecrease in accounts paya%le of H7,GGG.
5c6 No cash re(uired.
5d6 -in1ed with sales of fi)ed assets 5in#estin! acti#ities6.
c. $he income statement prepared on the accrual %asis is desi!ned to reflect profita
%ility. Cash from operations measures the effects on cash of operatin! acti#ities, and is
%est for li(uidity and sol#ency analyses.
7-23
ro%lem 7+= 57? minutes6
a.
0a) Corporation
For the 2ear Ended 0ecem%er 8, 2ear :
5H thousands6
Cash pro#ided from 5used for6 operations
Net Income....................................................................... H8@G
Add 5deduct6 items to con#ert to cash %asis&
Amorti"ation............................................................... 8G
0epreciation............................................................... ?
Inc. in accounts paya%le........................................... G
Inc. in deferred income ta)....................................... 8:
Inc. in other current lia%ilities................................... 7
Inc. in accounts recei#a%le....................................... 5 8G6
Inc. in in#entories....................................................... 58=?6
Inc. in prepaid e)penses........................................... 5:?6
Net cash used for operations......................................... H58@@6
Cash pro#ided from 5used for6 in#estin! acti#ities

urchase of patents........................................................ 58=G6
Addition to plant and e(uipment................................... 57GG6
Addition to other assets................................................. 5:?6
Net cash used for in#estin! acti#ities........................... 5 @?6
Cash pro#ided from 5used for6 financin! acti#ities

Addition to lon!+term de%t............................................. GG
Issuance of common stoc1............................................ :GG
0i#idends paid ................................................................ 58G 6
Net cash pro#ided from financin! acti#ities................ 8
Net decrease in cash....................................................... H58=G6
S pple&ental disclos re of cash flow infor&ation

Cash paid durin! year for&
Interest................................................. H: ,GGG
Income ta)es....................................... H7G,GGG
7-24
ro%lem 7+=9continued
% $he ma*or reasons for the difference %etween net income of H8@G and cash
outflow for operations of H8@@ are the hea#y in#estments in in#entories of H8=? and the
increased le#el of financin! of customers e#idenced %y a H 8G hi!her recei#a%les %alance.
Compared to these hea#y in#estments in operatin! assets, accounts paya%le ha#e
increased #ery modestly. With risin! sales and profits, the company is e)periencin! a
prosperity s(uee"e.
c. $his situation must %e addressed %efore the li(uidity pro%lem %ecomes more
serious. $he followin! actions are reasona%le recommendations&
8. $he lar!er #olume of purchases *ustifies increased trade credit. $he resultin!
e)pansion of accounts paya%le would increase cash from
operations.
: $he company needs a lar!er e(uity capital %ase. With increasin! profits and with
the company %ein! in a !rowth industry this may %e a !ood time
to sell stoc1 without dilutin! earnin!s per share.
. Issuance of e(uity will form a !ood %ase for further %orrowin! should
%usiness continue to e)pand rapidly.
= After additional e(uity capital has %een o%tained the company should consider
lowerin! the di#idend payout. For a fast !rowin! and profita%le company such as 0a), a
di#idend payout ratio of @ U 5H8G OH8@G6 is (uite hi!h. >i#en its current profit
opportunities, more earnin!s should %e retained in the %usiness.
7-25
ro%lem 7+? 5=G minutes6

Nia!ara Company
For 2ear Ended 0ecem%er 8, 2ear
Cash receipts from operations
ales Ma ..................................................................... H G
Cash payments for operations
urchases of in#entory M% ...................................... 5@=?6
ellin! and !eneral e)penses ................................ 58GG6
Interest e)pense Mc .................................................. 5=G6
Income ta) e)pense Md ............................................ 5 G6
Cash flows from operations......................................... H8@?
urchase of fi)ed assets......................................... 58?G6
Repayment of notes paya%le................................... 5:?6
Issuance of lon!+term de%t..................................... ?G
Cash di#idends paid................................................. 5 G6
Cash flows used in financin!....................................... 5?6
Net increase in cash...................................................... H 8G
3e!innin! cash %alance................................................ ?G
Endin! cash %alance..................................................... H @G
Notes&
Ma ales................................................................................ H8,GGG
-ess increase in recei#a%les......................................... 5:G 6
Cash collections............................................................ H G
M% Cost of !oods sold......................................................... H 5@?G6
Add increase in in#entories........................................... 5:G6
-ess increase in paya%les............................................. :?
5@=?6
Mc Interest e)pense............................................................. H 5?G6
-ess increase in interest paya%le................................. 8G
5=G6
Md Income ta) e)pense....................................................... H 5=G6
-ess increase in deferred income ta)......................... 8G
5 G6
Note& urchase of fi)ed assets is computed from depreciation e)pense plus chan!e in fi)ed assets
5H8GGJH?G6. 0i#idends paid is computed from net income and chan!e in retained earnin!s
5H@G+H G6.
S pporting sched le for 'FO &
Net income..................................................................................................... H @G
Add depreciation........................................................................................... 8GG
Increase in deferred ta)................................................................................ 8G
Increase in recei#a%les................................................................................. 5:G6
Increase in in#entory.................................................................................... 5:G6
Increase in accounts paya%le...................................................................... :?
Increase in interest paya%le......................................................................... 8G
Cash flows from operations......................................................................... H8@?
7-26
ro%lem 7+@ 5 ? minutes6
Effects Analytical Entries 5'ptional6
a. M+2, 88,GGG 3ad 0e%t E)pense.......................... 88,GGG

MCC, 88,GGG Allowance for 3ad 0e%t.......... 88,GGG
%. M+2, 8@,GGG 0epreciation................................... 8@,GGG

M2A, 8@,GGG Accumulated 0epreciation..... 8@,GGG
c. MNAA, 8GG,GGG 3uildin!........................................... 8GG,GGG

MN0E, 8GG,GGG -on!+$erm Note aya%le......... 8GG,GGG
d. None
e. None
f. MJC, 8G,GGG Cash................................................. 8G,GGG

M+2, :,GGG -oss................................................. :,GGG
MCC, 8:,GGG In#entory................................... 8:,GGG
!. MJC, ?,GGG Cash................................................. ?,GGG

M0C, ?,GGG Accounts Recei#a%le..................... ?,GGG
MCC, :?,GGG In#entory................................... :?,GGG
MJ2, 8?,GGG >ain........................................... 8?,GGG
h. MCC, ,GGG Allowance........................................ ?,GGG

M+2, ,GGG 3ad 0e%t E)pense.......................... ,GGG
Accounts Recei#a%le............... ,GGG
i. MAA, 8GG,GGG Assets.............................................. 8GG,GGG

M+C, 8GG,GGG Cash.......................................... 8GG,GGG
M+2, :G,GGG 0epreciation e)pense.................... :G,GGG
M2A, :G,GGG Accumulated 0epreciation..... :G,GGG
*. MJC, ,GGG Cash................................................. ,GGG

MA0, ,GGG -oss on ale................................... 8,GGG
M2A, 8,GGG /achinery 5net6......................... ,GGG
M+2, 8,GGG
7-27
ro%lem 7+7 5@G minutes6
art I.

a. M0-, 8GG,GGG Current ortion of -+$ 0e%t.......... 8GG,GGG
%. MJC, =,GGG Cash................................................. =,GGG

MA0, =,GGG -oss................................................. 8,GGG
M2A, 8,GGG E(uipment................................. ?,GGG
M+2, 8,GGG
c. M+2, 7?,GGG -oss................................................. 7?,GGG

MCC, 7?,GGG In#entory................................... 7?,GGG
d. MJC, : ,GGG Cash................................................. : ,GGG

M0E, : ,GGG aid+In Capital................................ :,GGG
$reasury stoc1.......................... G,GGG
e. MNAA, GG,GGG lant Assets.................................... GG,GGG

MN0E, GG,GGG /ort!a!e aya%le.................... :?G,GGG
/ort!a!e aya%le9Current... ?G,GGG
f. MJC, @,GGG In#estment....................................... G,GGG

MJ2, G,GGG E(uity in NI of u%sidiary....... G,GGG
M2 , :=,GGG Cash................................................. @,GGG
In#estment @,GGG
!. MJC, 8G,GGG Cash................................................. 8G,GGG

MJ2, =G,GGG Accounts Recei#a%le, current....... 8G,GGG
M0C, 8G,GGG Accounts Recei#a%le, noncurrent :G,GGG
MNC, :G,GGG ales.......................................... =G,GGG
h. M0C, ,GGG In#entory......................................... ,GGG

MJ2, ,GGG Cost of >oods old................. ,GGG
i. M0C, :@G,GGG Current Assets................................ :@G,GGG

MCC, 8@G,GGG lant and E(uipment..................... @7G,GGG
M0E, =8G,GGG Current -ia%ilities.................... 8@G,GGG
M+C, @G,GGG -on!+$erm 0e%t....................... =8G,GGG
Cash 5H=GG+H=G6....................... @G,GGG
*. M+2, @G,GGG E)pense........................................... @G,GGG

MCC, @G,GGG Allowance for dou%tful accounts @G,GGG
7-28
ro%lem 7+79continued
art II.
a. MAA, 8:G,GGG In#estment....................................... 8:G,GGG

M+C, 8:G,GGG Cash.......................................... 8:G,GGG
%. M2 , 7,?GG In#estment....................................... 7,?GG

MJ2, 7,?GG E(uity in Earnin!s.................... 7,?GG
c. MJC, ,GGG In#estment....................................... ,GGG

MJ2, ,GGG E(uity in Earnin!s.. ,GGG
M2 , @,GGG Cash................................................. ,GGG
In#estment................................ ,GGG
d. MJC, =,GGG Cash................................................. =,GGG

MA0, =,GGG E(uipment 5net6........................ ,GGG
M2 , 8,GGG >ain on ale ............................ 8,GGG
MJ2, 8,GGG
e. MJC, @G,GGG Cash................................................. @G,GGG

MI-, @G,GGG Note aya%le 5current6............ @G,GGG
f. MN0R, ,GGG 3onds aya%le............................... ,GGG

MN0E, ,GGG Common stoc1......................... :,GGG
aid+In Capital.......................... 7,GGG
!. MJC, @,GGG Cash................................................. @,GGG

M0E, @,GGG $reasury stoc1.......................... =,GGG
aid+In Capital.......................... :,GGG
h8.MAA, :GG,GGG In#estment....................................... :GG,GGG

M0E, 8GG,GGG Common stoc1......................... 8GG,GGG
h:.M0C, G,GGG Current Assets 5H8:G+H=G6............. G,GGG
MAA, 8 G,GGG lant and E(uipment..................... 8 G,GGG
M0E, 8=G,GGG Current -ia%ilities.................... @G,GGG
M+C, @G,GGG -on!+$erm 0e%t....................... =G,GGG
Common stoc1......................... 8GG,GGG
Cash 5H8GG+H=G6....................... @G,GGG
i. M+2, =,GGG /inority Interest E)pense............. =,GGG

M2A, =,GGG /inority Interest....................... =,GGG
7-29
art II.
*. M+2, ?G,GGG In#entory -oss................................ ?G,GGG

MCC, ?G,GGG In#entory................................... ?G,GGG
1. None Allow. for dou%tful accounts......... 8,:GG

Accounts recei#a%le 8,:GG
l. MNAA, 8:G,GGG -eased E(uipment......................... 8:G,GGG

MN0E, 8:G,GGG -on!+$erm de%t........................ 8:G,GGG
m. None Retained Earnin!s.......................... 8 G,GGG

Common stoc1 ........................ 8:G,GGG
aid+in Capital......................... @G,GGG
n. M+2, :7,GGG 3ad 0e%ts E)pense....................... :7,GGG

MCC, :7,GGG Allow for 0ou%tful Accounts. . :7,GGG
7-30
ro%lem 7+ 5=? minutes6

3IR0 C'R 'RA$I'N
3alance heet
As of 4anuary 8, 2ear 8
Assets
Cash.............................................................................. H ?G,GGG
Accounts recei#a%le................................................... G,GGG
In#entory....................................................................... 88G,GGG
Current assets............................................................. H:?G,GGG
roperty, plant, and e(uipment................................. H=@?,GGG
-ess& Accumulated depreciation............................... : ?,GGG : G,GGG
'ther noncurrent in#estments................................... :=?,GGG
$otal assets.................................................................. H7:?,GGG
-ia%ilities and E(uity

Accounts paya%le........................................................ H @G,GGG
Current portion of lon!+term de%t............................. 88G,GGG
Current lia%ilities......................................................... H87G,GGG
-on!+term de%t............................................................ 8 ?,GGG
Common stoc1............................................................ : G,GGG
Retained earnin!s....................................................... G,GGG
$otal lia%ilities and e(uity.......................................... H7:?,GGG
)ote* +-Acco nts for ,econstr ction of alance Sheet (Optional!

Cash
3e! 5H8GG,GGG Endin! + H?G,GGG Incr.6 ?G,GGG
'perations
Net income 586 8?G,GGG ?G,GGG 5?6 >ain on sale of in#estments
0epreciation e)pense 5:6 ?,GGG G,GGG 5@6 Increase in accounts recei#a%le
-oss on sale of e(uip 5 6 ?,GGG :G,GGG 576 Increase in in#entory
Increase in accounts paya%le 5=6 =G,GGG
In#estin!
ale of e(uipment 5 6 8G,GGG 8?G,GGG 58G6 Additions to property and e(uip.
ale of in#estments 5 6 ?,GGG
Financin!
Issuance of common stoc1 5886 8G,GGG G,GGG 58 6 Cash di#idends
Additions to lon!+term de%t 58:6 8?,GGG G,GGG 58=6 0ecrease in current portion
of lon!+term de%t
Endin! 8GG,GGG
7-31
ro%lem 7+ 9continued
Retained Earnin!s roperty, lant, and E(uipment

58 6 G,GGG G,GGG 3e! 3e! =@?,GGG
8?G,GGG 586 58G6 8?G,GGG @?,GGG 5 6,5 6 5a6
8?G,GGG End End ??G,GGG
'ther Noncurrent In#estments Accumulated 0epreciation

3e! :=?,GGG =?,GGG 5?6,5 6 5a6 ?G,GGG : ?,GGG 3e!
?,GGG 5:6
End :GG,GGG :7G,GGG End
-on!+term 0e%t Common toc1

8 ?,GGG 3e! : G,GGG
8?,GGG 58:6 8G,GGG
:GG,GGG End GG,GGG
Accounts Recei#a%le In#entory

3e! G,GGG 3e! 88G,GGG
5@6 G,GGG 576 :G,GGG
End 8:G,GGG End 8 G,GGG
Accounts aya%le Current ortion of -on!+$erm 0e%t
@G,GGG 3e! 58=6 G,GGG 88G,GGG

=G,GGG 5=6
8GG,GGG End G,GGG
7-32
ro%lem 7+ 5 G minutes6
Current Wor1in! Capital Cash from 'perations Analytical Entries 5'ptional6

Ratio Effect Amount Effect Amount 0r. Cr.
a. J NE HG + H8,GGG Wa!es aya%le Cash

%. + NE G NE G urchases Acct.
ay.
c. + + 7G,GGG NE G -oss Acct.
ay.
d. NE NE G J ,GGG Cash Acct.
Rec.
e. + + 8GG,GGG NE G -and Cash
f. J NE G NE G Note aya%le Cash
!. J J 8?,GGG NE G Note Recei#a%le -and
h.J J G,GGG NE G Cash aid+in Cap
i. + + :G,GGG NE G /achine Cash
+$
-ia%.
-+$
-ia%.
*. + + ?G,GGG NE G 3ond aya%le Cash
remium on 3. ay. >ain
1. + + 8G,GGG NE G Retained Earnin!s 0i#.
ay.
l. J NE G NE G 0i#idend aya%le Cash
m. NE NE G NE G Retained Earnin!s t1 0i#
ay
n.NE NE G NE G toc1 0i#idend ay. aid+in Cap
Capital
t1
o. NE NE G NE G No entry
p. + NE G NE G Cash Notes
ay.
(. J NE G + :G,GGG Accounts aya%le Cash
r. + + :G,GGG NE G atent Cash
s. + + 8?,GGG + 8?,GGG -oss /1t%le
ec
t. NE NE G NE G -oss 'r!.
E)p.
u.NE NE G NES G 0epreciation E)p. Accum 0ep
#. J J : ,GGG NE G Accounts Recei#a%le ales
w. J J G,GGG NES G Cash
3uildin!
>ain
7-33
). J J ?,GGG NE G Cash
/achine
Notes Recei#a%le
y. + + =G,GGG NE G Income $a) E)pense Inc $a)
ay
0ef $a)
5-$6
S$ransaction does not effect cash from operations. <owe#er, the co&p tation of cash from
operations is effected if it is calculated usin! the indirect method.
7-34
ro%lem 7+8G 5=? minutes6

a. $he two measures are summary performance metrics from two different
statements 5or portions of statements6 that deal with operations9the income
statement and the cash from operations 5CF'6 section of the statement of cash
flows. $here is considera%le confusion amon! users of financial statements a%out
%oth the concept of BoperationsB and a%out the different aspects of operations
that these two measures are desi!ned to portray.
$he function of the inco&e state&ent is to measure the profita ilit of the
enterprise for a !i#en period. $his is done %y reco!ni"in! re#enue when earned, and
then matchin! e)penses with those re#enues. /oreo#er, costs incurred durin! a
period that do not create future %enefits must %e char!ed to e)pense re!ardless of
the a#aila%ility of related re#enues a!ainst which they can %e matched. While no
other statement measures profita%ility as well as the income statement, it does
not show the timin! of cash flows and the effect of operations on li(uidity and
sol#ency. Conse(uently, other speciali"ed statements are needed to focus on the
latter factors, which are different dimensions of earnin!+related acti#ities.
'ash fro& operations ('FO! encompasses the %roader concept of operations
compared with net income. It encompasses all earnin!+related acti#ities of the entity
and it is concerned not only with re#enues and e)penses %ut also with the cash
demands of these acti#ities such as in#estments in customer recei#a%les and in
in#entories as well as the financin! pro#ided %y suppliers of !oods and ser#ices. We
can arri#e at operatin! cash receipts and dis%ursements %y ad*ustin! net income for
items needed to con#ert it to the cash %asis 5indirect format6. We must remem%er
that CF' focuses on li(uidity and is not a measure of profita%ility as it e)cludes
important costs such as the use of lon!+li#ed assets in operations, nor important
re#enues such as e(uity in the earnin!s of nonconsolidated su%sidiaries or affiliates.
%. Analysis of $ransactions
Net Income Cash from 'perations
8. J NE
:. J NE
. NE NE
=. NE NE
?. NE J
@. + NE
7. NE NE
. + NE
. NE +
8G. + NE
88. NE NE
8:. + NE
8. + NE
8=. + NE
8?. NE NE
8@. J NE
87. + NE
8. NE NE
8. + NE
:G. + NE
:8. NE NE
::. NE +
7-35
ro%lem 7+88 57? minutes6
a. As an initial step, the effect of the Qraft ac(uisition must first %e remo#ed from the
hilip /orris 5 /6 accounts. $he resultin! %alance sheet chan!es are
hilip /orris nad*usted / Ad*.

2ear 7 2ear Chan!e Qraft Chan!e
Accts. Rec%le. H:,G@? H :,::: H 8?7 H 7? H 5@G86
In#entories .... =,8?= ?, = 8,: G 8,: : 5:6
E ............. @,? : ,@= :,G@@ 8,7=G :@
>oodwill ........ =,G?: 8?,G78 88,G8 8G, @8 @?
+$ 0e%t........ 8,==G 8,:? 58 86 7GG 5 86
Accts. ay. .... 78 8,777 @ ?7 =G
Accrued lia%.. :,:77 ,= 8,?78 ?G 8,G=8
-+$ 0e%t......... @,: 87,8:: 8G, : GG ,:
7-36
$his permits one to deri#e the statement of cash flows9indirect format
<I-I /'RRI C'/ ANIE , INC.
For the 2ear Ended 0ecem%er 8, 2ear
Net income...................................................................... H :, 7
Add 5deduct6 ad*ustments to cash %asis
0epreciation e)pense.............................................. @?=
Amorti"ation of !oodwill......................................... 8:?
0ecrease in accounts recei#a%le............................ @G8
0ecrease in in#entories........................................... :
0ecrease in deferred ta)es...................................... 5 :?6
Increase in accounts paya%le.................................. =G
Increase in accrued lia%ilities................................. 8,G=8
Increase in income ta)es paya%le.......................... @:
Net cash flow from operatin! acti#ities..................... H ?,:G?
Increase in property, plant e(uipment
5%efore depreciation6.................................................. 5 G6
Increase in !oodwill 5%efore amorti"ation6................ 57 6
0ecrease in in#estments.............................................. =G?
Ac(uisition of su%sidiary9Qraft S.............................. 588, 6
Net cash used %y in#estin! acti#ities......................... 58:,7=86
0ecrease in short+term de%t........................................ 5 86
Increase in lon!+term de%t........................................... ,:
0ecrease in e(uity 5repurchase6 SS........................... 5?=G6
0i#idends declared....................................................... 5 =86
Increase in di#idends paya%le..................................... =7
Net cash pro#ided %y financin! acti#ities................. 7,@8=
Net increase in cash..................................................... H 7
S pple&ental disclos re of cash flow infor&ation

Interest paid durin! year ......................................................................... H @7G
Income ta)es paid durin! the year.......................................................... H8, ?
Notes&
S $otal of Qraft assets and lia%ilities remo#ed from year to year chan!es and shown as cash outlay for
in#estin! acti#ity.
SS $he net issuance or repurchase of e(uity is computed %y reconcilin! the stoc1holders e(uity account
as follows&
8:O 8O2ear 7 %alance............................................................................................. H@, :
2ear net income................................................................................................. :, 7
0i#idend declared................................................................................................. 5 =86
$otal........................................................................................................................ ,:8
8:O 8O2ear %alance............................................................................................. 57,@7 6
0ecrease in e(uity 5repurchase6.......................................................................... H ?=G
7-37
% Note& For the complete statement of cash flows, the followin! presentation 5direct
format6 of the cash flows from operatin! acti#ities section should replace the cash flows from
operatin! acti#ities section 5usin! the indirect format6 for the statement of cash flows in part a.
<I-I /'RRI C'/ ANIE , INC. Cash Flow From 'perations For 2ear Ended 0ecem%er 8, 2ear
5H /illions6
Cash receipts from operations
ales Ma ..................................................................... H :, =
Cash payments for operations
urchases of in#entory M% ...................................... 588,7=@6
ellin! and administrati#e e)penses Mc ................ 58 , @ 6
Interest e)pense Md .................................................. 5@7G6
Income ta) e)pense Me ............................................ 58, ? 6
Cash flows from operations......................................... H?,:G?
Notes
Ma & ales................................................................................... H 8,7=:

0ecrease in accounts recei#a%le..................................... @G8
Cash collections................................................................ H :, =
M% & Cost of !oods sold............................................................ 58:,8?@6

0ecrease in in#entories.................................................... :
Increase in accounts paya%le........................................... =G 588,7=@6
Mc & ellin! and administrati#e e)pense................................. 58=,=8G6

Increase in accrued lia%ilities........................................... 8,G=8 58 , @ 6
Md & Interest e)pense 5as !i#en6............................................... 5@7G6
Me & Income ta) e)pense........................................................... 58, G6

Increase in income ta)es paya%le.................................... @:
0ecrease in deferred income ta)es.................................. 5 :?6 58, ? 6
7-38
ro%lem 7+889concluded
c. Free cash flow can %e defined in #arious ways. $he startin! point is cash flow from
operatin! acti#ities of H?,:G? million. tudents may want to remo#e interest e)pense from
operatin! cash flow if they do so, it should %e on an after+ta) %asis. From operatin! cash
flow, capital e)penditures should %e deducted. It would %e proper to differentiate capital
e)penditures re(uired to maintain e)istin! %usiness from those that !enerate !rowth. $he
simplest calculation would %e operatin! cash flow less capital e)penditures& H?,:G?+H G D
H=,::? million. 'ther #ariations are possi%le. tudents should also su%tract di#idends paid of
H =. $his yields a free cash flow of H , 8.
$he implications of free cash flow for a companyXs future earnin!s and
financial condition can include the&
8. Repayment of de%t resultin! in lower interest cost and hi!her earnin!s. $his
would also reduce de%t ratios and impro#es interest co#era!e,
possi%ly leadin! to hi!her de%t ratin!s.
:. Repurchase of e(uity. $his may raise earnin!s per share and 5if repurchased
%elow stated %oo1 #alue per share6 would increase this %oo1 #alue.
. Increased a%ility to ma1e ac(uisitions 5such as Qraft6, which can pro#ide

future !rowth, %etter di#ersification, and lower ris1.
= Increased fundin! of internal !rowth throu!h capital spendin!, research and
de#elopment, new product introduction costs, and so forth.
? Increase in di#idends, pro#idin! lar!er payout of earnin!s to e(uity in#estors.
@ Increased li(uidity 5financial fle)i%ility6, allowin! the firm to respond to

une)pected needs and opportunities.
7-39
ro%lem 7+8: 5@G minutes6
a.
TE$A C'R 'RA$I'N
W'RQ <EE$ $' C'/ $E CA < F-'W FR'/ ' ERA$I'N
0IREC$ RE EN$A$I'N 5IN HGGG 6
/ear 0 /ear 5
'peratin! Cash Receipts and 0is%ursements

Net sales Ma 58 @,GGG J 8 ,GGG6
58??,GGG J : ,GGG6 MA .................................................. 8S H:G=,GGG H87 ,GGG
'ther re#enue and income........................................... :S
5I6 0 in current recei#a%les........................................... 5 ,GGG6 5:,=GG6
5I6 0 in non+current recei#a%les M% .............................. =
'ther ad*ustments Mc ................................................... ?
D CA < C'--EC$I'N ................................................. @ :G8,GGG 87?,@GG

$otal e)penses Ma M3 ................................................... 7S 8 @,GGG 87G,GGG
-ess& E)penses and losses not usin! cash
+ 0epreciation and amorti"ation................................... 5@,GGG6 5=,GGG6
+ Noncurrent deferred income ta)es............................ 58,@GG6 58,GGG6
+ 'ther minority interest................................................ 8G 5:GG6
+ 'ther loss on discontinued operations..................... 88 57GG6
+ 'ther............................................................................ 8:
Chan!es in Current Assets and -ia%ilities

related to 'perations
I 506 in in#entories......................................................... 8 8?, GG @,GGG
I 506 in prepaid e)pense................................................ 8= :GG
5I6 0 in accounts paya%le and accruals....................... 8? 5:,?GG6 5:,GGG6
5I6 0 in ta)es paya%le..................................................... 8@ 5?,7GG6 58,GGG6
5I6 0 in accruals.............................................................. 87
I or 0 other..................................................................... 8
I or 0 other..................................................................... 8
I or 0 in noncurrent accounts M% ................................. :G
D CA < 0I 3 R E/EN$ ........................................... :8 8 ?,:GG 8@ ,:GG
0i#idends Recei#ed
E(uity in income of unconsolidated affiliates............ ::S :,GGG 58,GGG6
+ ndistri%uted e(uity in income of affiliate............... : 58,=GG 6 8, GG
D 0IVI0EN0 FR'/ NC'N '- AFFI-IA$E ........... := @GG GG
'ther Cash Receipts 50is%ursements6....................... :?S

CA < F-'W FR'/ ' ERA$I'N Md ........................ :@ H @,=GG H 7,7GG
7-40
ro%lem 7+8:9continued
Notes&
5S6 $hese fi#e lines must e(ual reported net income per income statement M2ear @ #erification&
H:G=,GGG +H8 @,GGG J H:,GGG D H8G,GGG .
5a6 Includin! ad*ustments 5!rossin!+up6 of re#enue and e)pense of discontinued operations

reported in note.
5%6 0etermined to relate to operations 5descri%ed in footnotes6.
5c6 uch as remo#al of !ains included a%o#e 5descri%ed in footnotes6.
5d6 Reconcile to amount reported %y company. If not reported, reconcile to chan!e in cash for
period.
5A6 ales from discontinued operations 5see Note =6
2ear @ 2ear ?
536 E)penses per income statement................................................... 8@7,GGG 8 ,GGG
Income ta)es...................................................................................
8G,GGG 7, GG
/inority interest..............................................................................
:GG
0iscontinued operations...............................................................
8,8GG 8,:GG
-oss on disposal............................................................................
7GG
Cumulati#e effect of accountin! chan!e..................................... 58,GGG6 +
87 ,GGG 8=7,GGG
E)penses of discontinued operations......................................... 8 ,8GG :=,:GG
-oss on discontinued operations................................................. 58,8GG6S 58,:GG 6SS
8 @,GGG 87G,GGG
S Replaced %y sales of H8 ,GGG 5Note =6 + e)penses H8 ,8GG. SS Replaced %y sales of H: ,GGG
5Note =6 + e)penses H:=,:GG.
MNote& 0ue to the ac(uisition of $R' Company in 2ear @, the operatin! wor1in! capital accounts
include amounts so ac(uired and may distort cash inflows and outflows from operations.
%.
/ear 0 /ear 51
Income ta) e)pense............................................................... H8G,GGG H7, GG

$a)es in K%elow lineL items&
J $a) on cumulati#e effect.................................................... 8,GGG ++
P $a) on discontinued operations........................................ 58,8GG6 58,:GG6
P $a) on loss with disposal 57GG6 ++
,:GG
@,@GG
Increase in deferred income ta)........................................... 58,@GG6 58,GGG6
Increase in ta)es paya%le...................................................... 5?,GGG6 58,GGG6
Income ta)es paid.................................................................. H :,@GG H=,@GG
S 0ata for 2ear ? not pro#ided in financial statements.
7-41
ro%lem 7+8:9continued
c.
Chan!e in %alances of KAccounts aya%le and

AccrualsL9per %alance sheet.......................................
H@,GGG
-ess& Ad*ustment due to disposal Ma ............................ H GG
-ess& Ad*ustment due to $R' ac(uisition M% ............... ,:GG ,?GG
Ad*ustment to net income to arri#e at CF'................... H:,?GG
E)planations&
Ma Note = descri%es the loss on disposal9summari"ed as follows&

-oss on disposal..................................................................... 8,=GG
roperty, plant e(uipment .............................................. 8,GGG
In#entories S ........................................................................ 8GG
Accounts paya%le accruals S.......................................... GG
and
$a) paya%le S ........................................................................... 7GG
-oss on disposal................................................................. 7GG
No cash is in#ol#ed in this loss. <owe#er, if the operatin! wor1in! capital items
5mar1ed %y S6 in#ol#ed in this entry are not ad*usted, the operatin! cash flows will
%e distorted. $hus, the effect of this entry on these accounts must %e eliminated.
$he %alance sheet year+to+year chan!e in the BAccounts aya%le and AccrualsB
account shows an increase of H@,GGG. <owe#er, the chan!e related to cash effects
of operations is H GG less %ecause a H GG credit to the account represents a
noncash entry. $hus, the ad*ustment in the CF is H?,7GG. $he total ad*ustment from
loss on disposal in the CF can %e summari"ed as&
In#entories 5increase6.............................................................. 8GG

Accounts paya%le and accruals 5decrease6 ......................... GG
roperty, plant and e(uipment 5increase6............................. 8,GGG S
-oss on discontinued oper. 5add%ac1 to income6............ 7GG
$a)es paya%le 5increase6.................................................... 7GG
S $he amount of H@,?GG shown as additions to E reflects this ad*ustment.
M% Note descri%es the ac(uisition of $R' Company. Teta assumed accounts paya
%les and accruals of H ,:GG. $hese must %e remo#ed from the determination of CF'
to not distort this fi!ure. $he H ,:GG is shown as part of the amount determinin! the
ac(uisition price of $R'.
7-42
CA E
Case 7P8 5=? minutes6
a. 8. 0epreciation e)pense represents the allocation of the cost of fi)ed assets o#er the
useful life of the asset. Amorti"ation e)pense represents the allocation of the cost of intan!i
%le assets o#er the useful life of the asset. In each of these cases, the in#estin! cash
outflow occurs when the asset is ac(uired 5and not when its cost is su%se(uently allocated
to e)pense6.
: Chan!es in deferred ta)es impact reported ta) e)pense, %ut not ta)es paid.
Conse(uently, the statement of cash flows %e!ins with net income 5usin! reported ta)
e)pense6 and ad*usts for chan!es in deferred ta)es in order to deri#e cash ta)es paid.
. 0ecreases in recei#a%les cause operatin! cash flows to %e !reater than net
income %ecause cash has %een collected relatin! to re#enues recorded in a
pre#ious period.
= 0ecreases in in#entory cause operatin! cash flows to %e !reater than net income
%ecause cash was !enerated as in#entories are sold and not replenished.
% Net income is much less than operatin! cash flows in :GG? primarily %ecause of the
add+%ac1 of depreciation and amorti"ation, cash inflows arisin! from the ta) %enefits
relatin! to employee stoc1 options, and the reduction of operatin! wor1in! capital.
c. Free cash flows D Cash flow from operations P Capital additions P 0i#idends :GG?&
H?, 8G P H?:? P HG D H=,7 ?
:GG=& H ,@7G P H : P HG D H , =8
:GG & H ,? P H G? P HG D H ,:
d. 0ell has used free cash flows primarily to repurchase shares of its stoc1. $he e)cess
has %een in#ested in mar1eta%le securities.
e. 0ell can return cash to shareholders #ia di#idend payments and stoc1 repurchases.
Cash paid for di#idends is "ero, %ut stoc1 repurchases ha#e amounted to H ,?G million
5H=,:8 JH:,GGGJH:,: G6 o#er the past years.
7-43
Case 7P: 5=G minutes6

a. Analysis of the statement of cash flows su!!ests that this strate!y was
implemented durin! 2ear . pecifically, durin! that year the cash flows of -andsX
End to %uildup its in#entory to implement its new policy are #ery hi!h 9 H8G=.?
=? million cash outflow to ac(uire additional in#entory.
% 8. 0epreciation e)pense represents the allocation of the cost of fi)ed assets o#er the
useful life of the asset. Amorti"ation e)pense represents the allocation of the cost of intan!i
%le assets o#er the useful life of the asset. In each of these cases, the in#estin! cash
outflow occurs when the asset is ac(uired 5and not when its cost is su%se(uently allocated
to e)pense6.
: Increases in recei#a%les cause operatin! cash flows to %e less than net income
%ecause re#enues 5reflectin! recei#a%les6 are included in net income, %ut the related
cash may not yet %e recei#ed. Con#ersely, decreases in recei#a%les cause operatin! cash
flows to %e !reater than net
income %ecause cash is recei#ed for re#enues reco!ni"ed in prior periods. .
0ecreases in in#entory cause net income to %e hi!her than operatin! cash
flows %ecause sales re#enue is reco!ni"ed when earned %ut the in#entory
sold can %e paid for in earlier periods. Increases in in#entory cause
operatin! cash flows to %e less than net income %ecause cash was used to
increase in#entory le#els. When these in#entories are su%se(uently sold,
re#enues will %e earned and net income will %e increased. <owe#er, this
in#entory will %e e)pensed on the income statement in the period that it is
sold.
= Each year, -andsX End esta%lishes a reser#e for sales returns. As a result, a
reconcilin! item is created %etween net income and operatin! cash flows %ecause the cash
outflow to co#er the reser#e will occur in the ne)t period when a portion of the sold items is
actually returned.
c. Free cash flows D Cash flow from operations P Capital additions P 0i#idends 2ear
ended 2ear & H 7=,:@G P H=@,7?G P HG D H :7,?8G
2ear ended 2ear & H 5:@, :6 P H=7,@? P HG D H57=,? 86
2ear ended 2ear 7& H8:8,7 ? P H8 ,= 8 P HG D H8G , 8=
d. -andsX End appears to ha#e recently used its free cash flow to repurchase shares.
Assumin! that mana!ement doesnXt ha#e any positi#e net present #alue pro*ects for
e)pansion a#aila%le, this is a reasona%le use of free cash flow as it returns cash to
shareholders. $hese shareholders can then in#est these funds accordin! to their ris1 and
return preferences.
7-44
Case 7+ 5 G minutes6
a. 2ahoo issued stoc1 5common and preferred6 to !enerate the necessary cash flows
to finance its %usiness acti#ities and !rowth opportunities.
% Net income 5re#enues and e)penses6 appears to %e dri#in! operatin! cash flows for
2ahoo. As net income increases 5decreases6, operatin! cash flow increases 5decreases6.
c. 2ahoo has su%stantial cash reser#es !enerated #ia e(uity issuances. $his e(uity
capital is necessary to finance pro*ected !rowth in the upcomin! years. ntil the company
re(uires the cash, it is %ein! in#ested in mar1eta%le securities in a desire to earn a hi!her
than KnormalL rate of return.
d. $his amount represents cash recei#ed %efore re#enue is reco!ni"ed 5that is, the
ser#iceOproduct is not yet deli#ered6. /ost of this deferred re#enue li1ely is related to
prepaid ad#ertisin! re#enue recei#ed in ad#ance.
7-45
Case 7+= 5@G minutes6

a.
W2A$$ C'R 'RA$I'N
For the 2ear Ended 0ecem%er 8, 2ear 8G
Net income S.......................................................................... H8 @,GGG
Add 5deduct6 ad*ustments to cash %asis
0epreciation e)pense..................................................... :=@,GGG
>ain on sale of e(uipment SS......................................... 5=,GGG6
Increase in accounts recei#a%le.................................... 5888,GGG6
Increase in in#entories................................................... 5:8 ,GGG6
Increase in accounts paya%le........................................ 8G ,GGG
0ecrease in income ta)es paya%le................................ 5:?,GGG6
Increase in other paya%les............................................. :,GGG
Net cash flow from operatin! acti#ities............................. H:@ ,GGG
roceeds from sale of e(uipment....................................... =,GGG
Additions to plant and e(uipment....................................... 5:8:,GGG 6
Net cash used %y in#estin! acti#ities................................ 587 ,GGG6
Issuance of stoc1.................................................................. 87,GGG
0i#idends............................................................................... 57=,GGG6
Reduction of de%t................................................................. 587,GGG 6
Net cash pro#ided %y financin! acti#ities......................... 57=,GGG6
Net increase in cash........................................................... H 87,GGG
Cash %alance, 0ecem%er 8, 2ear .................................. 87?,GGG
Cash %alance, 0ecem%er 8, 2ear 8G................................ H8 :,GGG
Notes&
S 0etermination of 2ear 8G net income&
Retained earnin!s, 8:O 8O2ear 8G........................................... H8,@ ,GGG
Retained earnin!s, 8:O 8O2ear ............................................. 58,?:@,GGG6
88:,GGG
lus& 0i#idends paid................................................................ 7=,GGG
2ear 8G net income................................................................... H 8 @,GGG
SS0eri#ation of !ain on sale of e(uipment&
Accumulated depreciation, 8:O 8O2ear ................................ H 8@,GGG
0epreciation e)pense.............................................................. :=@,GGG
H8,8@:,GGG
Accumulated depreciation, 8:O 8O2ear 8G.............................. 58,8 8,GGG6
Accumulated depreciation on e(uipment sold..................... H 8,GGG
'ri!inal Cost............................................................................ H @8,GGG
Accumulated depreciation on e(uipment sold..................... 5 8,GGG6
3asis of e(uipment.................................................................. H G,GGG
roceeds from sale.................................................................. =,GGG
>ain on sale.............................................................................. H =,GGG
7-46
Case 7+=9continued
% In 2ear 8G, Wyatt Corporation !enerated cash from operations of H:@ ,GGG after
considerin! operatin! wor1in! capital needs. u%tractin! pro*ected de%t ser#ice of H
GG,GGG per year and estimated capital spendin! of H :?,GGG per year from that fi!ure
lea#es a decidedly ne!ati#e num%er. $hat is, there is not sufficient cash to fund %oth the de
%t ser#ice and the e)pansion pro*ect for any e)tended period of time. $herefore, the le#era!
ed %uyout and the capital spendin! plan are mutually not compati%le !oals9at least not as
currently proposed. Wyatt cannot do %oth. /oreo#er, it pro%a%ly should not do either one if
it wishes to maintain a reasona%le mar!in of safety.
7-47
Case 7+? 57? minutes6
0'VER C'R .
For the 2ear Ended 0ecem%er 8, 2ear

Net income.................................................................................... H G?,GGG
Ad*ustments to reconcile net income to net cash
pro#ided %y operatin! acti#ities&
0epreciation.................................................................................. :,GGG
Amorti"ation of patent................................................................. ,GGG
-oss on sale of e(uipment.......................................................... 8G,GGG
E(uity in income of $op Corp...................................................... 5 G,GGG6
>ain on sale of mar1eta%le e(uity securities............................ 58 ,GGG6
0ecrease in allowance to reduce mar1eta%le
e(uity securities to mar1et........................................................ 58?,GGG6
Increase in accounts recei#a%le................................................. 5 ?,GGG6
0ecrease in in#entories............................................................... G,GGG
0ecrease in accounts paya%le and accrued lia%ilities ............. 588?,GGG6
Net cash pro#ided %y operatin! acti#ities ................................ H:7:,GGG

ale of mar1eta%le e(uity securities.......................................... 88 ,GGG
ale of e(uipment ........................................................................ 8 ,GGG
urchase of e(uipment................................................................ 58:G,GGG6
Net cash pro#ided %y in#estin! acti#ities ................................. 87,GGG

Issuance of common stoc1......................................................... :@G,GGG
Cash di#idend paid....................................................................... 5 ?,GGG6
ayment on note paya%le............................................................ 5 GG,GGG6
Net cash used in financin! acti#ities.......................................... 58:?,GGG6
Net increase in cash..................................................................... H8@=,GGG
Cash at %e!innin! of year ........................................................... G7,GGG
Cash at end of year...................................................................... H=78,GGG
7-48
Case 7+?9continued
Feasi%ility Analysis of /ana!ementXs roposal

Cash from operations, 2ear .................................................. H :7:,GGG
Additional interest cost............................................................ 5:GG,GGG6
Annual e(uipment in#estments............................................... 58 G,GGG6
-ess 2ear outlay..................................................................... 8:G,GGG
Annual in#entory %uildup......................................................... 5@G,GGG6
ro*ected cash shortfall........................................................... H 5= ,GGG6
Other considerations in Assessing Manage&ent2s roposal*

Non+CF' cash flows in 2ear are H58G ,GGG6 9 a cash outflow. <owe#er, di#idend
payments can pro%a%ly %e reduced. A ultimate (uestion is whether the
in#estment in e(uipment will yield positi#e additions to CF'. $he current analysis
raises serious dou%ts a%out the feasi%ility of this proposal.
)O+4* upportin! computations for the CF draw on these $+accounts 5HGGGs6
Cash
3e!innin! G7
'peratin!
586 -oss on sale of e(uipment 8G = 5:6 >ain on sale of securities
5=6 Net income G? =
5%6 0ecrease in In#entory G G 5c6 E(uity in $op Corp.
5e6 Amorti"ation of patents G
5f6 0epreciation : ? 5a6 Increase in accounts recei#a%le
?
88? 5!6 0ecrease in accounts paya%le
88?
In#estin!
586 roceeds from sale of 8:G 5d6 Additions toE

e(uipment 8 8:G
5:6 roceeds from sale of
securities 88
Financin!
5 6 Issue of common stoc1 :@G GG 5h6 Increase in note paya%le
? 5?6 0i#idends
Endin! =78
7-49
Case 7+?9continued
/ar1eta%le ecurities, at cost Allow. to Reduce /ar1eta%le ec. to /ar1et
3e! :?G 8GG 5:6 5:6 8? :? 3e!

8GG
End 8?G 8G End
Accounts Recei#a%le In#entories
3e! ?8? 3e! G G 5%6

5a6 ?
End ??G End 8G
In#estment in $op Corp. 5at e(uity6 E
3e! G 3e! 8,G7G =? 586

5c6 G 5d6 8:G
End =:G End 8,8=?
atent Accum. 0epreciation
3e! 88 5e6 586 87 :G 3e!

: 5f6
End 8G =? End
-on!+$erm Note aya%le Accounts aya%le and Accrued -ia%ilities
5h6 GG GG 3e! 5!6 88? @G 3e!
@GG End =? End
Common toc1 0eferred Income $a)es
@?G 3e! 8G 3e!

:GG 56
?G End 8G End
Retained Earnin!s Additional aid+In Capital
5?6 ? @? 3e! 87G 3e!

G? 5=6 @G 56
?? End :G End
7-50

Kunci Jawaban Analisis Laporan Keuangan Bab 7

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Chapter 07 - Cash Flow Analysis

• tatement of Cash Flows

• E)plain the rele#ance of cash flows in analy"in! %usiness acti#ities.

• 0escri%e reportin! of cash flows %y %usiness acti#ities.

• 0escri%e the preparation and analysis of the statement of cash flows.

• Interpret cash flows from operatin! acti#ities.

• Analy"e cash flows under alternati#e company and %usiness conditions.

• 0escri%e alternati#e measures of cash flows and their usefulness.

• Illustrate an analytical tool in e#aluatin! cash flows 5Appendi) 7A6.

• <ow is de%t repayment achie#ed;

? $he two methods of reportin! cash flow from operations are&

re#enues such as the e(uity in the earnin!s of nonconsolidated su%sidiaries or

Chan!es in operatin! wor1in! capital items must %e similarly interpreted in li!ht of

Cash from 'perations 5CF'6

• Feasi%ility of financin! capital e)penditures and possi%le sources of such financin!.

E)ercise 7+: 5=G minutes6

5@6 A reconstructed analytical entry would appear as&

5 6 $his is a noncash transaction that is disclosed in a separate schedule of

a. Cash Flows from 'perations Computation&

5 6 If the difference %etween pension e)pense and actual fundin! is an accrued

E)ercise 7+= 5 G minutes6

a. 3e!innin! %alance of accounts recei#a%le......... H G?,GGG

%. Endin! %alance of in#entory................................. H ?= ,GGG

c. Issuance of common stoc1................................... H 8,GGG

d. Increase in land...................................................... H 8?G,GGG

E)ercise 7+? 5:G minutes6

So rce $se Ad% st&ent 'ategor

E)ercise 7+@ 5:G minutes6

E)ercise 7+7 5 G minutes6

)et 'ash fro& 'ash

E)ercise 7+ 5:G minutes6

a. 0epreciation is neither a source nor a use of cash. Instead, depreciation is an

E)ercise 7+ 5@G minutes6

a. Cash Collections Computation&

%. Cash 0i#idends aid Computation&

0i#idend paid M77 8 7.? :. 3e! M=

c. Cost of >oods and er#ices roduced Computation& In#entories

3e! M = 8. =G ?.? Cost of products sold M8=

! $he KEffect of e)chan!e rate chan!es on cashL represents translation ad*ustments

h. Any !ain or loss is reported under Bother, netB9Item M@G .

i. Free cash flows D

E)ercise 7+8G 58? minutes6

E)ercise 7+88 58? minutes6

Ref. Reported Ad*ust. Re#ised

Cash 0is%ursements for 'perations

Chan!e in Current Assets and -ia%ilities

ro%lem 7+: 57? minutes6

Ref. Reported Ad*ust. Re#ised

Cash 0is%ursements for 'perations

ro%lem 7+ 57? minutes6

Cash flows from in#estin! acti#ities

Cash flows from financin! acti#ities

S pple&ental disclos re of 'ash Flow infor&ation

urchases.................................. 5=G,GGG6 5=7,GGG6 ayments to

ro%lem 7+= 57? minutes6

Cash pro#ided from 5used for6 in#estin! acti#ities

Cash pro#ided from 5used for6 financin! acti#ities

S pple&ental disclos re of cash flow infor&ation

hilip /orris nadusted / Ad.