Acc – q3.2 articulation of the statement of cash flows

Chapter 3: Question & Exercise 3.2 on page 203, 3.10 on page 204, 3.14 on page 205, 3.15 on page 205, and 3.17 on pages 208-209 

Articulation of The Statement of Cash Flows With Other Financial Statements. Describe how the statement of cash flows is linked to each of the other financial statements (income statement and balance sheet). Also review how the other financial statements are linked with each other.

Interpreting Relations Between Net Income and Cash Flow From Operations. Combined data for three years for two firms appear below (in millions:.

Firm A Firm B
Net income $2,381 $2,825
Cash flow from operations $1,133 $7,728

One of these firms is, a rapidly growing internet retailer, and the other is Kroger, a retail grocery store chain growing at approximately the same rate as the population. Identify each firm and explain your reasoning.


Relation Between Net Income, EBITDA, and Cashflow From Operations. Selected data for The Walt Disney Company appear below (in millions).

Year 4 Year 3 Year 2 Year 1
Net income $2,345 $1,267 $1,236 $1,169
Conversion of net income to cash flow from operations:
Non-working capital adjustment 2,076 1,370 1,077 2,124
Working capital adjustments (51) 264 (27) (245)
Cash flow from operations $4,370 $2,901 $2,286 $3,048
EBITDA $5,554 $4,106 $3,919 $3,759
Growth rate in revenues 13.6% 6.8% 0.6% (0.6%)

Examine the differences between net income, cash flow from operations, and EBITDA for The Walt Disney Company. Comment on the relations among these series over time. Why does cash flow from operations exceed net income? What adjustments contribute to this pattern? Is this typical or usual? Why is EBITDA so much higher than both net income and cash flow from operation?

Interpreting The Statement of Cash Flows. Gap Inc. operates chains of retail clothing stores under the names of Gap, Banana Republic, and Old Navy. Exhibit 3.24 presents the statement of cash flows for Gap for Year ) to Year 4.

Statement of Cash Flows
(amounts in millions)

Year 4 Year 3 Year 2 Year 1 Year 0
Net income (loss) 1,150 1,031 478 (8) 877
Depreciation 620 675 706 81 590
Other additions and subtractions (28) 180 166 30 92
(Increase) Decrease in inventories (90) 385 (258) 213 (455)
(Increase) Decrease in prepayments (18) 5 33 (13) (61)
Increase (Decrease) in accounts payable 42 (10) (47) 42 250
Increase (Decrease) in other current liabilities (56) (106) 165 243 (3)
Cash Flow from Operations 1,620 2,160 1,243 1,318 1,290
Fixed assets acquired (442) (261) (308) (940) (1,859)
Changes in marketable securities 259 (2,063) (313) – –
Other investing transactions 343 6 (8) (11) (16)
Cash Flow from Investing 160 (2,318) (629) (951) (1,875)
Increase in short-term borrowing – – – – 621
Increase in long-term borrowing – 85 1,346 1,194 250
Issue of capital stock 130 26 153 139 152
Decrease in short-term borrowing – 0 (42) (735) –
Decrease in long-term borrowing (871) (668) – (250) –
Acquisition of capital stock (976) – – (1) (393)
Dividends (79) (79) (78) (76) (75)
Other financing transactions – 28 27 (11) (11)
Cash Flow from Financing (1,796) (608) 1,406 260 544
Change in Cash (16) (766) 2,020 627 (41)
Cash-Beginning of year 2,261 3,027 1,007 380 421
Cash-End of Year 2,245 2,261 3,027 1,007 380
Change in sales from previous year +2.6% +9.7% +4.4% +1.3% +17.5%


Discuss the relationship between net income and cash flow from operations and between cash flows from operating, investing, and financing activities for the firm over the five-year period.

• Chapter 8: Question & Exercise 8.4 on page 700, 8.6 on page 700, and 8.15 on page 702

Working Capital. Identify the working capital accounts related to (a) revenues recognized and deferred, (b) cost of goods sold, (c) employee salary and wages, and (d) income tax expense. For each account, indicate whether an increase in the working capital asset or liability would be an addition or subtraction when reconciling from net income to cash flows from operations.

Accounts Receivable. Using the following key, identify the effects of the following transactions or conditions on the various financial statement elements: I = increases; D = decreases; NE = no effect.

Assets Liabilities Shareholders’ Equity Net Income
A credit sale
Collection of a portion of accounts receivable
Estimate of bad debs
Write-off of a specific uncollectible account

Income Recognition For Various Types of Businesses. Discuss when each of the following types of businesses is likely to recognize revenues and expenses.

a. A bank lends money for home mortgages.
b. A travel agency books hotels, transportation, and similar services for customers and earns a commission from the providers of these services.
c. A Major League Baseball team sells season tickets before the season begins and signs its players to multiyear contracts. These contracts typically defer the payment of a significant portion of the compensation provided by the contract until the player retires.
d. A producer of fine whiskey ages the whiskey 12 years before sale.
e. A timber-growing firm contracts to sell all timber in a particular tract when it reaches 20 years of age. Each year it harvests another tract. The price per board foot of timber equals the market price when the customer signs the purchase contract plus 10 percent for each year until harvest.
f. An airline provides transportation services to customers. Each flight grants frequent-flier miles to customers. Customers earn a free flight when they accumulate sufficient frequent-flier miles

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