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1、Chapter 3 - SolutionsOverview:Problem Length Problem #s S 1, 3 M2, 7, 8, 12, 13 L4 - 6, 9 - 11, 14, 15 1.Sa.Palomba Pizza Stores Statement of Cash FlowsYear Ended December 31, 2000Cash Flows from Operating Activities: Cash Collections from Customers Cash Payments to Suppliers Cash Payments for Salar
2、ies Cash Payments for InterestNet Cash from Operating ActivitiesCash Flows from Investing Activities: Sales of Equipment Purchase of Equipment Purchase of LandNet Cash for Investing ActivitiesCash Flows from Financing Activities: Retirement of Common Stock Payment of DividendsNet Cash for Financing
3、Activities Net Increase in Cash Cash at Beginning of Year Cash at End of Year$ 250,000 (85,000) (45,000) (10,000) 38,000 (30,000) (14,000) (25,000) (35,000)$ 110,000 (6,000) (60,000)$ 44,000 50,000 $ 94,000 b.Cash Flow from Operations (CFO) measures the cash generating ability of operations, in addi
4、tion to profitability. If used as a measure of performance, CFO is less subject to distortion than net income. Analysts use the CFO as a check on the quality of reported earnings, although it is not a substitute for net income. Companies with high net income and low CFO may be using overly aggressiv
5、e income recognition techniques. The ability of a firm to generate cash from operations on a consistent basis is one indication of the financial health of the firm. Analysts search for trends in CFO to indicate future cash conditions and potential liquidity or solvency problems.Cash Flow from Invest
6、ing Activities (CFI) reports how the firm is investing its excess cash. The analyst must consider the ability of the firm to continue to grow and CFI is a good indication of the attitude of management in this area. This component of total cash flow includes the capital expenditures made by managemen
7、t to maintain and expand productive capacity. Decreasing CFI may be a forecast of slower future growth.Cash Flow from Financing (CFF) indicates the sources of financing for the firm. For firms that require external sources of financing (either borrowing or equity financing) it communicates managemen
8、ts preferences regarding financial leverage. Debt financing indicates future cash requirements for principal and interest payments. Equity financing will cause future earnings per share dilution.For firms whose operating cash flow exceeds investment needs, CFF indicates whether that excess is used t
9、o repay debt, pay (or increase) cash dividends, or repurchase outstanding shares.c.Cash payments for interest should be classified as CFF for purposes of analysis. This classification separates the effect of financial leverage decisions from operating results. It also facilitates the comparison of P
10、alomba with other firms whose financial leverage differs.d. The change in cash has no analytic significance. The change in cash (and hence, the cash balance at the end of the year) is a product of management decisions regarding financing. For example, the firm can show a large cash balance by drawin
11、g on bank lines just prior to year end.e. and f. There are a number of definitions of free cash flows.In the text, free cash flow is defined as cash from operations less the amount of capital expenditures required to maintain the firms current productive capacity. This definition requires the exclus
12、ion of costs of growth and acquisitions. However, few firms provide separate disclosures of expenditures incurred to maintain productive capacity. Capital costs of acquisitions may be obtained from proxy statements and other disclosures of acquisitions (See Chapter 14). In the finance literature, fr
13、ee cash flows available to equity holders are often measured as cash from operations less capital expenditures. Interest paid is a deduction when computing cash from operations as it is paid to creditors. Palombas free cash flow available to equity holders is calculated as follows:Net cash flow from
14、 operating activities less net cash for investing activities:$110,000 - $6,000 = $104,000 The investment activities disclosed in the problem do not indicate any acquisitions. Another definition of free cash flows, which focuses on free cash flow available to all providers of capital, would exclude p
15、ayments for interest ($10,000 in this case) and debt. Thus, Palombas free cash flow available to all providers of capital would be $114,000. 2.Ma.199619971998199920002001SalesBad debt expenseNet receivablesCash collections1$ - - 30$ -$ 140 7 40$ 123$150 7 50$133$165 8 60$147$175 10 75$150$195 10 95$
16、1651 Sales - bad debt expense - increase in net receivablesb. 19971998199920002001Bad debt expense/sales5.0%4.7%4.9%5.7%5.1%Net receivables/sales28.633.336.442.848.7Cash collections/sales87.988.789.185.784.6c.The bad debt provision does not seem to be adequate. From 1997 - 2001 sales increased by ap
17、proximately 40%, while net receivables more than doubled, indicating that collections have been lagging. The ratios calculated in part b also indicate the problem. While bad debt expense has remained fairly constant at 5% of sales over the 5 year period, net receivables as a percentage of sales have
18、 increased from 29% to 49%; cash collections relative to sales have declined. Other possible explanations for these data are that stated payment terms have lengthened or that Stengel has allowed customers to delay payment for competitive reasons.3-203.SNiagara CompanyStatement of Cash Flows 2001Cash
19、 collectionsCash inputsCash expensesCash interest paidIncome taxes paid Cash from OperationsPurchase of fixed assetsCash Used for InvestingIncrease in LT debtDecrease in notes payableDividends paidCash Used for FinancingNet Change in CashCash Balance 12/31/00Cash Balance 12/31/01$ 980 (670) (75) (40
20、) (30)$ 165 (150) (150) 50 (25) (30) (5)$ 10 50 $ 60 Sales - D Accounts ReceivableCOGS + D InventorySelling & General Expense - D Accounts Payable1Interest Expense - D Interest PayableIncome Tax Expense - D Deferred TaxDepreciation Expense + D Fixed Assets (net)Net Income - D Retained earnings 1 Can
21、 also be used to calculate cash inputs, decreasing that outflow to $645 while increasing cash expenses to $100.4.La.G CompanyIncome Statement, 2000 ($ thousands)SalesCOGS + operating expenses1DepreciationInterestTaxes Net income$ 3,841 3,651 15 41 42$ 92receipts from customers + increase in accounts
22、 receivablepayments - increase in inventory + increase in accounts payableincrease in accumulated depreciationpaymentspayment + increase in tax payablecheck = change in retained earnings as there are no dividends1 Note that these two items cannot be calculated separately from the information availab
23、le.b.M CompanyCash Receipts and Disbursements, 2000 ($ thousands)Cash receipts from: Customers Issue of stock Short-term debt Long-term debt TotalCash disbursements: COGS and operating expenses Taxes Interest Dividends PP&E purchase TotalChange in cash$ 1,807 3 62 96$ 1,968 $ 1,843 3 51 22 33$ 1,952
24、$ 16 Sales - increase in receivablesIncrease in accountIncrease in liabilityIncrease in liabilityCOGS + operating expense + increase in inventory + decrease in accounts payableExpense - increase in tax payableExpenseIncome + increase in retained earningsChange in PP&ENote: This is not a true receipt
25、s and disbursements schedule as it shows certain amounts (e.g., debt) on a net basis rather than gross. Such schedules (and cash flow statements) prepared from published data can only show some amounts net, unless supplementary data are available.c.The cash flow statements are presented with the inc
26、ome statement for comparison purposes in answering Part d.M Company: Statement of Cash Flows($ thousands)19961997199819992000CFO:From customersLess outlays for:COGS/oper. exp.InterestTaxesCFI:PP&E purchaseCFF:Issue of stockShort-term debtLong-term debtDividendsStock repurchase LT debt repaidST debt
27、repaidChange in cash$1,165 1,130 15 23 $ (3) (14) 5 64 - (20) (22) (2) - $ 25 8 $1,210 1,187 19 19 $ (15) (17) 5 65 - (21) (14) (2) - $ 33 1 $1,327 1,326 16 9 $ (24) (37) 8 - 100 (21) - (3) (8)$ 76 15 $1,587 1,672 21 9 $ (115) (30) 3 153 - (21) (10) - - $ 125 (20)$1,807 1,843 51 3 $ (90) (33) 3 62 9
28、6 (22) - - - $ 139 16 M Company: Income Statement ($ thousands)19961997199819992000SalesCOGSOperating expenseDepreciationInterestTaxes Total Net Income$ 1,220 818 298 9 15 38$ 1,178 42$ 1,265 843 320 10 19 33$ 1,225 40$ 1,384 931 363 11 16 27$ 1,348 36$ 1,655 1,125 434 12 21 26$ 1,852 37$ 1,861 1,27
29、7 504 14 51 6$ 1,852 9G Company: Statement of Cash Flows($ thousands)19961997199819992000CFO:From customersDisbursements:COGS/Oper. exp.InterestTaxes CFI:PP&E purchaseCFF:Issue of stockShort-term debtLong-term debt Change in cash$1,110 1,214 11 13 $ (128) - 10 80 40 $ 130 $ 2$1,659 1,702 13 15 $ (71
30、) - - 52 23 $ 75 $ 4 $2,163 1,702 23 16 $ (93) (20) 5 91 20 $ 116 $ 3 $2,809 2,895 29 29 $ (144) (10) 45 3 125 $ 173 $ 19 $3,679 3,778 41 35 $ (175) - 30 60 50 $ 140 $ 35 G Company-Income Statement($ thousands)19961997199819992000SalesCOGSOperating expenseDepreciationInterestTaxes Total Net income$
31、1,339 1,039 243 10 11 13$ 1,316$ 23$ 1,731 1,334 312 10 13 20$ 1,689$ 42$ 2,261 1,743 398 12 23 27$ 2,203$ 58$ 2,939 2,267 524 14 29 31$ 2,865$ 74$ 3,841 - 3,651 15 41 42$ 3,749$ 92Note: 2000 COGS and operating expense are combined as there is insufficient information to separate them.d.Both compani
32、es are credit risks. Although both are profitable, their CFO is increasingly negative. If current trends continue they face possible insolvency. However, before rejecting both loans outright, it is important to know whether CFO and income differ because the companies are doing poorly or because they
33、 are growing too fast.Both companies increased sales over the 5 year period; Company M by 50%, Company G by more than 300%. Are these sales real (will cash collections materialize)? If they are growing too fast, it may be advisable to make the loan but also to force the company to curtail its growth
34、 until CFO catches up. One way to verify whether the gap is the result of sales to poor credit risks is to check if the growth in receivables is proportional to the sales growth. Similar checks can be made for the growth in inventories and payables. In this case, the inventory of M company has doubl
35、ed from 1996 to 2000 while COGS increased by only 56%. The inventory increase would be one area to investigate further.There is a significant difference in the investment pattern of the two companies. Company M has made purchases of PPE each year, while Company G has made little net investment in PP
36、E over the period. Yet Company G has grown much faster. Does this reflect the nature of the business (Company G is much less capital intensive) or has Company G used off balance sheet financing techniques?The cash from financing patterns of the two companies also differ. Both tripled their total deb
37、t over the period and increased the ratio of total debt to equity. Given Company Ms slower growth (in sales and equity), its debt burden has grown much more rapidly. Despite this, Company M has continued to pay dividends and repurchase stock. Company G has not paid dividends and has issued new equit
38、y. These two factors account for its larger increase in equity from 1996 to 2000.Based only on the financial data provided, G looks like the better credit risk. Its sales and income are growing rapidly, while Ms income is stable to declining on modestly growing sales. Unless further investigation ch
39、anges the insights discussed here, you should prefer to lend to Company G.5.La. (i)Statement of Cash Flows - Indirect Method Cash from operations:Net income$1,080Add noncash expense: depreciation 600Add/Subtract changes in working capital:Accounts receivable(150)Inventory(200)Accruals 80Accounts pay
40、able 120 (150) $1,530Cash from investing:Capital expenditures 1,150Cash from financing:Short term borrowing 550Long-term repayment (398)Dividends (432) $(280)Net change in cash $ 100Worksheet for (Indirect Method) Cash Flow Statement IncomeBalance SheetCashStatement12/31/0012/31/01ChangeEffectNet in
41、come$1,080 $1,080Depreciation 600 600Accounts receivable $1,500 $1,650 $150 (150)Inventory 2,000 2,200 200 (200)Accruals 800 880 80 80Accounts payable 1,200 1,320 120 120Depreciation (600) (600)Net fixed assets 6,500 7,050 550 (550) Capital expenditures$(1,150)Note payable 5,500 6,050 550 550 Short-term borrowing