5-53 Solutions
5.42 (Swoosh Shoes, Inc.; interpreting the statement of cash flows.)
a. Swoosh Shoes’ growth in sales and net income led to increases of
b. Swoosh Shoes increased its acquisitions of property, plant and
c. Swoosh Shoes used cash flow from operations during 2006 and 2007 to
finance its investing activities. The excess cash flow after investing
dividends.
d. Operating cash flows should generally finance the payment of
5.43 (Spokane Corporation; interpreting the statement of cash flows.) (We
have based this problem on the actual financial statements of the former
Boise Cascade Corporation.)
a. Forest products companies are capital intensive. Depreciation is
Solutions 5-54
b. Spokane Corporation had substantial changes in its property, plant
5-55 Solutions
5.43 continued.
c. For the three years combined, Spokane Corporation reduced its long-
term debt and replaced it with preferred stock. The sales of forest
5.44 (Interpreting statement of cash flow relations.)
American Airlines—Property, plant and equipment comprises a large
proportion of the total assets of American Airlines. Depreciation expense
American Home Products—Because of patent protection, pharmaceuti–
cal companies tend to generate relatively high profit margins and
significant cash flows from operations. Although the manufacturing
Solutions 5-56
5-57 Solutions
5.44 continued.
Interpublic Group—An advertising agency serves as a link between
clients desiring advertising time and space and various media with
advertising time and space to sell. Thus, the principal asset of an
Procter & Gamble—Procter & Gamble’s brand names create high profit
margins and cash flows from operations. Cash flow from operations is
Reebok—Cash flow from operations for Reebok is less than net income
plus depreciation, a somewhat unusual relationship for a seasoned firm.
Texas Instruments—Like American Home Products and Upjohn
Solutions 5-58
5-59 Solutions
5.44 continued.
ies with respect to the amount of depreciation relative to net income.
Despite generating less than one-half of the net income of American Home
Limited Brands—Current assets and current liabilities dominate the
balance sheets of retailers. Thus, working capital management is of
Upjohn—This problem includes Upjohn primarily to compare and
contrast it with American Home Products, also a pharmaceutical
5.45 (Fierce Fighters Corporation; interpreting direct and indirect methods.)
(We have taken these data from the statements of cash flows of Northrop
Grumman Corporation, which was for many years the only large company
a. We think this is hopeless. We cannot write a coherent explanation of
Solutions 5-60
5.45 continued.
b. Some academics think that even the question is nonsense—that is,
trying to explain changes in the data which themselves explain
changes in cash. The statement of cash flows explains the change in
the cash account from year to year. Consider that the statement of
c. A reader can more easily interpret the direct method. The
5.46 (Issues in manipulating cash flows from operations.)
a. This will increase cash flow from operations, assuming that had the
c. There is a continuing race between clever financial managers and
accounting standard setters about transactions such as this. Most
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Solutions 5-62
d. Not paying on time for items related to employment activities will, in
the short run, increase cash flow from operations. Suppliers will
f. This will increase cash flow from operations in the period of sale, but
5-63 Solutions
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