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Chapter 4
Answers to Review Problems
Finance For Executives – 4th Edition
1. Transactions.
2. Profits, losses, and cash flows.
A company can show a profit, while, during the same period, the cash flows from operating activities are
At the opposite, a firm can show a loss when its cash flows from operating activities is positive in two
cases:
a. The margin component of the operating cycle is negative and the working capital requirement
WCR CFOPE CFINV CFFIN
Owners’
Equity
3. Depreciation and cash flows.
Depreciation expense is not a cash transaction. Thus, before tax, depreciation expense has no impact on
the firm’s cash flows. Depreciation expense appears in the indirect approach to the cash-flow statement
in order to cancel out with the same amount that negatively affects earnings after tax.
Since depreciation expense is a tax deductible expense, the higher it is , the lower the tax bill and the
However, the statement may signify that an increase in the reported depreciation expense account reduces
4. Building a cash flow statement
a.
Receivables12/31/09 + Sales10 – Cash inflow from sales10 = Receivables12/31/10
Cash inflow from operations10 = Sales10– (Receivables’12/31/10 – Receivables12/31/09)
b.
Cash outflow from operations = Cash outflow from the purchase of material
Cash outflow from the purchase of material:
Payables12/31/09 + Purchases10 – Cash outflow from purchases10 = Payables12/31/10
Cash outflow from purchases10 = Purchases10 – (Payables12/31/10 – Payables12/31/09)
The material purchased in 2010 was either sold that year or went to the inventories:
Cash outflow from purchases10
Cash outflow from labor expenses:
Accrued expenses12/31/09 + Labor expenses10 – Cash outflow from labor expenses10
= Accrued expenses12/31/10
Cash outflow from labor expenses10 = Labor expenses10
– (Accrued expenses12/31/10 – Accrued expenses12/31/09)
Cash outflow from SG&A:
Prepaid expenses12/31/09 – SG&A expenses10 + Cash outflow from SG& expenses10
= Prepaid expenses12/31/10
Cash outflow from SG&A expenses10 = SG&A expenses10
+ (Prepaid expenses 12/31/10 – Prepaid expenses12/31/09)
Cash outflow from tax expenses10:
Cash outflow from operations10:
c.
NOCF10 = Cash inflow from operations10 – Cash outflow from operations10
Note that this is the same amount one would have found using equation 4.1:
change in working capital requirement in 2010.
Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses
December 31, 2009:
December 31, 2010:
d.
Net fixed assets12/31/09 + Acquisitions10 – Disposals10 – Depreciation expenses10 = Net fixed
assets12/31/10
Since there was no disposal of fixed assets in 2010, the net cash flow from investing activities was equal
to the amount of acquisitions during that year.
Acquisitions10 = Net fixed assets12/31/10 – Net fixed assets12/31/09 + Depreciation expenses10
e.
Net cash flow from financing activities = Long-term borrowing + Short-term borrowing
+ Repayment of long-term debt + Interest payments + Dividends
f.
Total net cash flow = Net operating cash flow + Net cash flow from investing activities
+ Net cash flow from financing activities
which is, as expected, the same as the difference between the amount of cash held by the company at the
5. Two cash flow statements.
a.
Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses
– Accounts payable – Accrued expenses
December 31, 2009:
December 31, 2010:
Managerial balance sheets
in thousands December 31,
2009
December 31,
2010
Invested capital
(–) Dividend payments (220)
D. Total net cash flow (A + B + C) ($55)
2 Capital expenditures10 = Net fixed assets10 – Net fixed assets09 + Depreciation expenses10
4 $1,300 – $1,200 = $100
Cash-flow statement according to FASB 95
in thousands 2010
Cash flows from operating activities
A. Net cash provided by operating activities ($935)
Cash flows from investing activities
B. Net cash flow from investing activities ($330)
Cash flows from financing activities
C. Net cash flow from financing activities $1,210
D. Total net cash flow (A + B + C) ($55)
1 WCR12/31/10 – WCR12/31/09 = $6,710 – $4,884 = $1,826
2 Capital expenditures10 = Net fixed assets10 – Net fixed assets09+ Depreciation expenses10
