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37) How does the statement of cash flows aid analysts in the evaluation of a company’s financial
situation?
38) Explain what investors look for in a statement of cash flows.
39) For each section of the statement of cash flows shown below, indicate an unhealthy company
that has to pay its current liabilities by selling some of its long-term assets and borrowing from
the bank. Use a plus for net cash inflow and minus for net cash outflow:
1. Cash flows from operating activities:
2. Cash flows from investing activities:
3. Cash flows from financing activities:
40) For each section of the statement of cash flows shown below, indicate a healthy company
that has ample cash to buy long-term assets as well as pay off its loans to the bank. Use a plus for
net cash inflow and minus for net cash outflow:
1. Cash flows from operating activities:
2. Cash flows from investing activities:
3. Cash flows from financing activities:
41) The following information is available for two different retailers, both of whom began
business this year:
Cash flows from: (in 000’s)
New Co. A
New Co. B
Operating Activities
$ (50,000)
$ 40,000
Investing Activities
20,000
(90,000)
Financing Activities
40,000
60,000
Net increase in cash
$10,000
$10,000
Cash balance, Jan. 1
0
0
Cash balance, Dec. 31
$ 10,000
$ 10,000
Put an "X" in either the Company A or Company B
column:
Co. A
Co. B
1.
Which company appears to be purchasing long-term
assets?
2.
Which company would you expect to have future financial
troubles?
3.
Which company would you expect to have the greater
depreciation expense?
42) Jo Lynn Lee is learning about investing. She has learned that Warren Buffet uses free cash
flow as one of the tools to analyze companies. Explain to Jo Lynn why Warren Buffet and other
investors believe that free cash flow is a valuable tool to use when analyzing companies.
43) Why would a company cut its cash dividends? Is it ethical to cut the dividends?
44) Why is evaluating a company’s cash flow important for analysts?
45) Use the August transactions and financial statements for Team Shirts in Chapter 8 of your
textbook to answer these questions:
1.
If Team Shirts had used the indirect method of preparing the
statement of cash flows, would total cash from operating
activities be greater?
2.
If Team Shirts had used the indirect method of preparing the
statement of cash flows, would the net increase in cash for the
month be greater?
3.
Did cash increase or decrease in August?
4.
Which activity, operating, investing, or financing, provided the
greatest amount of cash in August?
5.
Did Team Shirts pay a cash dividend in August?
46) Team Instructions: Divide the class into teams of three or four people. Each team member
should work the following problem separately outside of class. Then give the students time in
class to compare answers with their teammates and put together a final correct copy of the
problem. Each team should turn in only one copy of the problem for grading. All team members
will receive the same grade.
Answer the following questions using the Statement of Cash Flows for Fixzit, Inc. below:
amounts in millions
December 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
$ 5,001
Depreciation and Amortization
1,319
Stock-based Compensation Expense
125
Increase in Receivables, net
(266)
Increase in Merchandise Inventories
(849)
Increase in Accounts Payable and Accrued Liabilities
917
Increase in Deferred Revenue
263
Increase in Income Taxes Payable
2
Increase in Deferred Income Taxes
319
Increase in Other Long-term Liabilities
119
Other
(46)
Net Cash Provided by Operating Activities:
6,904
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures
(3,948)
Payments for Businesses Acquired, net
(727)
Proceeds from Sales of Property and Equipment
96
Purchases of Investments
(25,890)
Proceeds from Sales and Maturities of Investments
25,990
Net Cash Used in Investing Activities:
(4,479)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Borrowings, net of discount
995
Repayments of Long-Term Debt
(510)
Repurchase of Common Stock
(3,106)
Proceeds from Sale of Common Stock, net
285
Cash Dividends Paid to Shareholders
(719)
Net Cash Used in Financing Activities:
(3,055)
Change in Cash
(630)
1.
Has the Statement of Cash Flows been prepared
using the direct or indirect method?
2.
Which activity section is affected by the use of the
direct versus the indirect method?
3.
Given sales were $73,904 million and the changes in
Accounts Receivables and Deferred Revenues
(Unearned Revenues) above, cash collected from
customers must have been:
4.
Did cash increase or decrease during the year?
5.
Given the change in cash for the year, do you expect the company to have financial
difficulties in the near future? Why or why not?
6.
Did the company have to use long-term financing to
pay its current liabilities?
7.
Is the cash from operating activities considered
favorable or unfavorable?
8.
What are Capital Expenditures?
9.
Is the company expanding or contracting?
10.
Do you expect the company’s depreciation expense to be more or less in the next
year?
11.
Do you expect the company’s interest expense to be more or less in the next year?
12.
Did the company issue any common stock during the
year?
13.
Did the company pay a dividend to its owners?
47) Team Instructions: Divide the class into teams of three or four people. Each team member
should work the following problem separately outside of class. Then give the students time in
class to compare answers with their teammates and put together a final correct copy of the
problem. Each team should turn in only one copy of the problem for grading, along with a copy
of the annual report that it used. All team members will receive the same grade.
Provide students with copies of real merchandising companies’ annual reports, or give students
the Web addresses of real merchandising companies and ask them to print out and submit the
annual reports. All team members should work with the same company’s annual report.
Answer the following questions using the annual report assigned to your team:
1.
What is the name of your company?
2.
Has the Statement of Cash Flows been prepared using the
direct or indirect method?
3.
Which activity section is affected by the use of the direct
versus the indirect method?
4.
Calculate how much cash was collected from customers in the
most recent year:
5.
Did cash increase or decrease during the year?
6.
Given the change in cash for the year, do you expect the company to have
financial difficulties in the near future? Why or why not?
7.
Did the company have to use long-term financing to pay its
current liabilities?
8.
Is the cash from operating activities considered favorable or
unfavorable?
9.
Is the company expanding or contracting?
10.
Do you expect the company’s depreciation expense to be more
or less in the next year?
11.
Do you expect the company’s interest expense to be more or
less in the next year?
12.
Did the company pay a dividend to its owners?
48) Match each of the following items with the appropriate definition. Use each item only once.
a. cash from investing activities
b. direct method
c. cash budget
d. cash from operating activities
e. indirect method
f. cash from financing activities
g. free cash flow
______ 1. method of preparing the operating activities section of the statement of cash flows,
which shows every cash inflow and every cash outflow
______ 2. method of preparing the operating activities section of the statement of cash flows,
which starts with net income and makes adjustments for all the items that are not cash
______ 3. section of the statement of cash flows, which includes all cash receipts and cash
disbursements for routine sales and purchases made in the course of doing business
______ 4. section of the statement of cash flows, which includes all cash receipts and all cash
disbursements for long-term business assets
______ 5. section of the statement of cash flows, which includes all cash receipts and all cash
disbursements for loans, contributions from owners, and distributions to owners
______ 6. cash from operating activities minus dividends and capital expenditures
______ 7. managers use this information internally to anticipate any cash shortages
49) Match each of the following items with the appropriate definition. Use each item only once.
a. cash from investing activities
b. direct method
c. cash budget
d. cash from operating activities
e. indirect method
f. cash from financing activities
g. free cash flow
______ 1. managers use this information internally to anticipate any cash shortages
______ 2. section of the statement of cash flows, which includes all cash receipts and all cash
disbursements for loans, contributions from owners, and distributions to owners
______ 3. method of preparing the operating activities section of the statement of cash flows,
which shows every cash inflow and every cash outflow
______ 4. section of the statement of cash flows, which includes all cash receipts and cash
disbursements for routine sales and purchases made in the course of doing business
______ 5. section of the statement of cash flows, which includes all cash receipts and all cash
disbursements for long-term business assets
______ 6. cash from operating activities minus dividends and capital expenditures
______ 7. method of preparing the operating activities section of the statement of cash flows,
which starts with net income and makes adjustments for all the items that are not cash
Learning Objective 9-8
1) In general, investors and analysts prefer most to see ________.
A) positive cash from operating activities
B) negative cash from operating activities
C) positive cash from investing activities
D) positive cash from financing activities
2) If a company were to manipulate the statement of cash flows to please analysts, it would most
likely report cash paid ________.
A) for operating expenses as capital expenditures
B) for capital expenditures as operating expenses
C) for repayment of loans as capital expenditures
D) for repayment of loans as operating expenses
3) If a company were to manipulate the statement of cash flows to please analysts, it would most
likely report cash received ________.
A) from the sale of stock as cash from the sale of intangible assets
B) from the sale of intangible assets as cash from the sale of capital assets
C) from loans as cash collected from customers
D) from the sale of land as cash received from the issuance of stock
4) Investors use the statement of cash flows in order to determine whether a company has
positive cash flows from operating activities.
5) Investors should be aware that management may unethically misclassify cash from the sale of
land as cash from customers in order to look better.
6) Misclassifying cash from long-term borrowings as cash collected from customers will make
the cash from investing activities higher than it should.
7) It is considered proper and ethical to classify cash paid for interest as a financing activity on
the statement of cash flows.
8) Krupt, Inc., an international company, classified cash transferred to Krupt from its subsidiaries
in foreign countries as cash collected from customers on its statement of cash flows. The
subsidiaries classified the same cash transferred to Krupt, Inc., the parent company, as payment
of long-term debt on their statements of cash flows. Which sections of the consolidated
statement of cash flows (both the parent and its subsidiaries combined) will be affected and how?
Does this classification of cash seem ethical?
9) At the end of the year, Krupt, Inc. added the payroll checks that were distributed to employees
but had not yet cleared the bank back to its Cash account. Which sections of the statement of
cash flows will be affected and how? Does this treatment seem ethical?
