财务报表分析与运用杰拉尔德课后答案英文版第三章

Chapter 3 - SolutionsOverview:Problem Length Problem #’s{S} 1, 3{M} 2, 7, 8, 12, 13{L} 4 - 6, 9 - 11, 14, 151.{S}a.Palomba Pizza StoresStatement of Cash Flowsb. Cash Flow from Operations (CFO) measures the cashgenerating ability of operations, in addition toprofitability. If used as a measure of performance, CFOis less subject to distortion than net income. Analystsuse the CFO as a check on the quality of reportedearnings, although it is not a substitute for netincome. Companies with high net income and low CFO maybe using overly aggressive income recognitiontechniques. The ability of a firm to generate cash fromoperations on a consistent basis is one indication ofthe financial health of the firm. Analysts search fortrends in CFO to indicate future cash conditions andpotential liquidity or solvency problems.Cash Flow from Investing 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 management 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 management's 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 to repay debt, pay (or increase) cash dividends, or repurchase outstanding shares.c. Cash payments for interest should be classified as CFFfor purposes of analysis. This classification separates the effect of financial leverage decisions from operating results. It also facilitates the comparison of Palomba with other firms whose financial leverage differs.d. The change in cash has no analytic significance. Thechange 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 drawing on bank lines just prior to year end.e. andf.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 firm’s current productive capacity. This definition requires the exclusion 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, free cash flows available to equity holders are often measured as cash from operations less capital expenditures. Interest paid isa deduction when computing cash from operations as itis paid to creditors. Palomba’s free cash flow available to equity holders is calculated as follows:Net cash flow from operating activities less net cash for investing activities:$110,000 - $6,000 = $104,000The 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 payments for interest ($10,000 in this case) and debt. Thus, Palomba’s free cash flow available to all providers of capital would be $114,000.1 Sales - bad debt expense - increase in net receivablesc. The bad debt provision does not seem to be adequate.From 1997 - 2001 sales increased by approximately 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 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.{S}Niagara CompanyStatement of Cash Flows 20011 Can also be used to calculate cash inputs, decreasing that outflow to $645 while increasing cash expensesto $100.3-44.{L}a.G Company1 Note that these two items cannot be calculated separately from theinformation available.b.M CompanyNote: This is not a true receipts 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 incomestatement for comparison purposes in answering Part d.Note: 2000 COGS and operating expense are combined as there is insufficient information to separate them.d. Both companies are credit risks. Although both areprofitable, 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 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 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 doubled 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 PPE 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 debt over the period and increased the ratio of total debt to equity.Given Company M's 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 equity. 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 M's income is stable to declining on modestly growing sales. Unless further investigation changes the insights discussed here, you should prefer to lend to Company G.5.{L}a. (i)Statement of Cash Flows - Indirect MethodCash from operations:Net income $1,080Add noncash expense: depreciation 600 Add/Subtract changes in working capital:Accounts receivable (150)Inventory (200)Accruals 80Accounts payable 120 (150)$1,530 Cash from investing:Capital expenditures 1,150Cash from financing:Short term borrowing 550 Long-term repayment (398) Dividends (432)$(280) Net change in cash $ 100The worksheet to create the cash flow statement is presented above. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. As a last check, the net income and the add-backs of non-cash items are balanced and “closed” to their respective accounts (PP&E and retained earnings) providing the amounts of capital expenditures and dividends.a. (ii) Statement of Cash Flows - Direct MethodCash from Operations:Cash collections $9,850Cash payments for merchandise (6,080)Cash paid for SG&A (920)Cash paid for interest (600)Cash paid for taxes (720)$1,530 Cash for Investing Activities:Capital expenditures (1,150) Cash for Financing Activities:Short-term borrowing 550Long-term debt repayment ( 398)Dividends ( 432)$( 280) Net Change in Cash $ 100The worksheet to create the cash flow statement is presented below. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. Furthermore the operating account changes are matched to their corresponding income statement item. As a last check, the net income is balanced and “closed” to retained earnings providing the amount of dividends.Note that there is no difference between the indirect and direct methods in the cash flow statement and in the worksheet for cash for investing and financing activities,6.{L}a. Exhibit 3P-3 does not provide the (changes in the)individual components that make up the changes inworking capital. As such, to create the direct methodcash flow statement, we must obtain the informationdirectly from the balance sheet. This procedure doesnot necessarily yield the same cash flow componentsusing the direct method as those provided by thecompany in its indirect method calculations.Differences may arise when1.there are acquisitions/divestments2.there are foreign exchange adjustments3.the firm aggregates or classifies investingaccruals together with operating ones.In this case, the differences are minimal as indicated below. (The calculations required for the direct method cash flow statement are presented in Exhibit 3S-1 along with the assumptions used to generate the statement)* Assumed change in interest payable to conform to interest paid. ** From the indirect methodAs noted in Box 3-2, from 1996 to 2000, the company generated free cash flow (CFO less net capital expenditures) of $1.5 million, during the first six months the A. M. Castle added another $309 thousand. However, Box 3-2 also showed that over the five-year period, Castle paid nearly $50 million in dividends and borrowed nearly $130 million to finance its investments and acquisitions. This trend continued in the first six months of 2001 during which the firm borrowed an additional $4.664 million to help pay its dividends and meet capital expenditure needs.Cash generated from operations from 1996 through the end of the first 6 months of 2001 was $76 million but the company spent $154 million to replace productive capacity and for investments and acquisitions. When free cash flows is calculated on this basis (i.e. CFO –CFI) there is a shortfall of $78 million. This shortfall as well as dividend payments were financed by borrowing over the same period.The inability to meet its capital and dividend needs from operations clearly indicated that either the dividend would have to be reduced or the company would not be able to remain competitive and/or grow as needed.7.{M}a.•The Swedish GAAP cash flow statements (CFS) begin with pretax and pre-financial items whereas the U.S. GAAPCFS show adjustments to net income.•The net financial items aggregate interest costs and interest income from various sources (includingdividends and interest from associated companies andother interest income) .•Swedish GAAP CFS aggregate all changes in working capital; U.S. GAAP CFS provide detailed disclosure ofthe operating changes in components of working capital;non-operating changes are reported as components ofinvesting activities.•Swedish GAAP combines cash and cash equivalents, financial receivables (primarily receivables fromassociated companies) and financial liabilities(current and long-term debt) in a measure called netfinancial assets or liabilities. SFAS 95 shows thechange in cash and cash equivalents with changes infinancial receivables reported as components of CFO andCFI. Changes in current and long-term debt are reportedin cash from financing activities.b.The cash flow statement is shown on page 16.c. Disadvantages:(1)Aggregation of all changes in operating or workingcapital accounts combines cash consequences ofoperating and investing activities. As noted inthe chapter, investing activities tend to distortcash flow from operations.(2)The use of net financial items tends to obscuresoperating, investing, and financing activities.Although disclosure is available to facilitate itscalculation, no separate disclosure of actual cashoutflow for interest (financing) costs isprovided.(3)The inclusion of financial liabilities (borrowingand repayment) and financial receivables in liquidfunds distorts cash flows from both investing andfinancing activities. This approach also hampersthe analysis of free cash flows discussed in thechapter. It is also unclear what basis was used bythe company to allocate a portion of the financialreceivables to operating activities and theremainder to the net financial position category.[Part c is continued on page 17]3-167. c. (continued from page 15)Advantages:(1)The separate display of pre-interest and pre-taxcash flows permits a comparison across companieswith different capital structures and tax regimes.(2)Detailed disclosure of investment cash flows(acquisition and other) may facilitate analysis offree cash flows.8.{M}a. Differences between U.S. and IAS GAAP (see text page98):•IAS GAAP is permissive regarding the classification of interest and dividends received,interest paid, and dividends paid: these cashflows may be reported either as components of CFOor CFI (interest and dividends received) and CFF(interest and dividends paid). Roche classifiesinterest and dividends received as CFI andinterest and dividends paid as CFF.•Bank overdrafts may be reported as components of cash and cash equivalents in IAS GAAP; the changein bank overdrafts would not be reported as partof the statement of cash flows. U.S. GAAP requirestheir classification as liabilities and therefore,as components of financing cash flows. Rochefootnote 24 indicates that overdrafts are reportedas short-term debt but is unclear as to howchanges are reported in the cash flow statement.•Companies using IAS GAAP and the direct method are not required to report the reconciliation from netincome to CFO.b.Cash flow statement on page 18.Note that conversion to SFAS 95 results in only a smalldifference in CFO as the classification differenceslargely balance. However both CFF and (especially) CFIare quite different (both level and trend). The majordifference is that the large 2000 investment inmarketable securities is shown as a CFI outflow underIAS 7 but an increase in cash and marketable securitiesunder SFAS 95 assuming that the marketable securitieswould be considered cash equivalents under US GAAP.Roche footnote 19 contains general information aboutits marketable securities, but not enough detail todetermine which investments would be considered cashequivalents.3-18c. Advantage: IAS recommends separate disclosure of cashoutflows for maintenance expenditures and capital expenditures for growth; when available that can be a significant benefit.Disadvantages:(1)Available alternatives for the treatment ofinterest and dividends received, interest paid,and dividends paid (see answer to part a) maydistort CFO, CFI, and CFF and hamper comparisonswith companies using US GAAP or (for companiesusing IAS GAAP) choosing different alternatives.(2)For companies using the direct method, when thereconciliation from net income to CFO is notreported it is impossible to determined whetherchanges in operating assets and liabilities (e.g.inventory) are due to operating or other factors.9.{L}The cash flow statement shows a steady deterioration in CFO;albeit CFO remains positive. Income (before extraordinary items) on the other hand increases steadily at approximately 8%-10% per year.To explain the discrepancy between the pattern of income and CFO, we first compute the direct method cash flow statement and then compare the cash flow components with their income statement counterparts.The (abbreviated) cash flow statement under the direct method is presented below:The required calculations for the operating items are presented in Exhibit 3S-2 on page 21. The last item “other”is the plug amount used to arrive at the CFO presented in the indirect cash flow statement (Exhibit 3P-4).Exhibit 3S-2Worksheet for Operating Items for Direct Method SoCFThe comparison of the cash flow and income statement components is presented below:Credit and collections do not seem to be responsible for the deterioration in CFO. A comparison of cash collections with sales indicates that collections increased at a slightly faster pace than sales. The collections/sales ratio increased from 99.61% in 1992 to 99.84% in 1994.Inventory, however, is another matter. Payments for inventory increased by 37% whereas COGS increased by only 29%. This is indicative of inventory being bought and paid for but not being sold. The proportion of payments to COGS increased accordingly from 98.3% to 104.5% in two years. This 6% increase translates (based on COGS of close to $2,000,000) to an increased annual cash requirement of $120,000.Thus, the first cause of Radloc’s problems seems to be inventories. Its income may be overstated as inventory may have to be written down if it cannot be sold. Even if inventory is eventually sold and the purchases now being made now are able to satisfy future growth, the firm may still face liquidity problems as it requires cash to purchase (and carry) the new inventory.However, as CFO is still positive the firm may still be a good candidate for credit.Further insights as to the impact of growth can be seen if we compare free cash flow (CFO - CFI) with income and CFO.(100,000)(50,000)-50,000100,000150,000Although income rises, CFO and free cash flow fall. CFO exceeds income in 1992 and 1993 as the noncash depreciation addback increases CFO relative to income. By 1994, however, CFO, (although positive) falls below income. This indicates that the firm may have problems in covering the replacement of current productive capacity.Free cash flow is negative in 1993 and 1994 and “barely” positive in 1992. This indicates that the firm’s growth (in addition to inventory) requires cash that Radloc cannot supply internally.Where did the cash come from?In 1993, it met its cash requirements by issuing stock; in 1994 the firm’s short term debt increased considerably as it drew down its revolving credit lines.Thus, the loan should not be granted as the firm seems to be facing an increasing liquidity crisis..Note : Radloc is an anagram for Caldor, a chain of discount stores. The data in Exhibit 3P-4 were taken from Caldor’s published financial statements. Caldor filed for Chapter 11 bankruptcy soon after the 1994 statements were published.10.{L}a. This part of the question requires an understanding ofSFAS 95, which governs the preparation of the Statementof Cash Flows. SFAS 95 permits use of either the director indirect method. As an initial step under eithermethod, the effect of the Kraft acquisition must beremoved as follows:The transactional analysis worksheet and statement ofcash flows are shown on pages 25 and 26 respectively.b. The simplest calculation would be operating cash flowless capital expenditures: $5,205 - $980 = $4,225million. But many variations are possible.The more important part of the question is theconnection between free cash flow and future earningsand financial condition. Possible uses of free cashflow include:1) Repayment of debt resulting in lower interest costand higher earnings. This also reduces debt ratiosand improves interest coverage, possibly leadingto higher debt ratings.2) Repurchase of equity may raise earnings per shareand (if repurchased below stated book value orreal value per share) increase these.3) Acquisitions (such as Kraft) that may providefuture growth, better diversification, lower risk,etc.4) Expenditures to fund internal growth throughcapital spending, research and development, newproduct costs, etc.* The net issuance or repurchase of equity is computed by reconciling the stockholders' equity account:Reconciliation of Stockholders' Equity12/31/87 balance $ 6,8231988 net income 2,337Dividends declared (941)Total $ 8,21912/31/88 balance (7,679)Decrease in stockholders' equity (repurchase) $ 540Philip Morris Companies, Inc. Worksheet for Statement of Cash FlowsIndirect Methodc. If the acquired inventories and receivables are soldthe proceeds will be reported as cash flow fromoperations (CFO). As their acquisition was reported ascash used for investment, CFO will be inflated. Thiswill occur if Kraft reduces its required level ofinventories and receivables because of operatingchanges (such as changes in product lines or creditterms) or the use of financing techniques that removethese assets from the balance sheet.11.{L}a. The first step is to match the items from the indirectcash flow statement with their corresponding items onthe income statement as below.1* It is possible the pension credit may also be included in “cost of products sold.”1 As a result of this matching, depreciation expense and restructuring expense offset and are eliminated from the direct method cash flow statement.* In Note H, Westvaco provides (as required by SFAS 95) the amount of interest and income tax paid. Our calculations must be adjusted to reconcile with these amounts. We have applied the adjustment to cash expenses, although it is possible that it should be applied to cash paid for inputs** Other income of $29 from income statement less (from indirect cash flow statement) gains on asset sales $18, plus currency losses of $3.6 and “other” of $3.8. [29 – 18 + 3.6 + 3.8 = 18)b. There are limited insights available from a singleyear’s direct method cash flow statement. However, we can compare some cash flow relationships with their income statement analogues:COGS to sales 70.3Cash inputs to cash collections 69.5%Selling, research, and admin. expense to sales 8.3% Cash expenses to cash collections 11.8% The second set of ratios shows the more significant difference. Westvaco’s cash expenses as a % of cash collections are much higher than the income statement relationships. The explanation (see chapter 12) is that Westvaco had a large noncash pension credit, which reduced net expenses.c. The company increased CFO (from $391 million in 1997 to$583 million in 2000) and substantially reduced its capital expenditures (see note H) from $621 million in 1997 to $229 million in 1999, generating the free cash flow needed to make acquisitions. Additional data used in Figure 3-1 tells the same story:FCF2 = CFO – CFI (where CFI = capital expenditures plus cash flows for acquisitions and from divestitures)The company borrowed funds in 1997 but reduced that debt in 1998 and 1999; outflows for dividends are lower but not significantly so. Thus, Westvaco used higher CFO and borrowing, combined with lower capital expenditures, to finance its 2000 acquisitions.12.{M}a. Hertz Corp. ($ millions)b.As reported, cash flow from operations shows steady improvement over the period 1989 - 1991, changing from a negative to a positive amount. After adjustment, the trend is eliminated; cash flow from operations is lower in 1991 than in either 1989 or 1990. The improvement in reported cash flow from operations was the result of reducing Hertz's net investment in rental equipment.d.Reported cash flow for investing shows little change over the three-year period. After reclassification of equipment purchases and sales, cash flow for investing drops by more than half in 1991. After reclassification it reflects the sharp drop in net car and truck purchases in that year.e.Free cash flow can be defined as cash flow from operations less investment required to maintain productive capacity. Ifwe assume that Hertz's investments are solely to maintain existing capacity, then free cash flow equals cash flow from operations less cash flow for investing:Note that reclassification of purchases and sales of revenue equipment has no effect on free cash flow:Thus by defining free cash flow in a manner which subtracts out all expenditures required to maintain the operating capacity of the firm, whether capitalized or not and regardless of classification, the effects of accounting and reporting differences can be overcome.This solution requires, of course, the identification of the amounts of such items.f. When equipment is purchased, the full amount isreported as an operating cash outflow. For leased equipment, only the periodic lease payments are reported as operating cash outflows. Thus, for Hertz, leasing increases reported cash flow from operations. g. When equipment purchases are classified as investingcash flows, then leasing reduces operating cash flows relative to purchases. That is because the outflow connected with purchases (or any other capitalized expenditure) is never classified as an operating outflow. [See Chapter 11 for a detailed analysis of this issue.]13.{M}a.Assumptions:1.Subsidies and other revenues are shown as a componentof cash flows from operating activities because theyinclude revenues and cash (subsidies) presumablyreceived from the government. We have assumed (and itappears so from data provided) that this item was notincluded in income (part of funds from operations). assets from consolidation are defined (elsewhere inRepsol’s financial statements –not provided in theproblem) as non-cash items resulting from accountingdifferences within the consolidated group. These areshown as a component of cash from operating activitiesto offset any items included in income.Note that Repsol’s statement of sources and applications of funds does not show the change in cash.The net change in cash in the table above reflects all changes except the effect of currency changes. If we separate out the actual change in cash and equivalents(65 in 1998, 297 in 1999) we can produce a statementthat is similar to the US GAAP format:b. A sources and uses statement does not recognizedifferences among operating, investing, and financing activities. SFAS 95 requires grouping of similar transactions in these three categories. Separate disclosure of the cash consequences of operating activities facilitates (1) an evaluation of the earnings and cash generating ability of the firm, (2) the quality of revenue and expense recognition principles used to prepare the financial statements, and (3) the computation of free cash flows.Separate disclosure of investing activities permits an assessment of capital expenditures, growth, and investments in other entities. Information about financing activities shows how the company finances its capital needs and dividend payments. Although the sources and uses format provides these data (and in gross form as required by SFAS 95) for investing and financing activities, it does not provide the disclosure by category; In contrast, SFAS 95 facilitates the analysis of free cash flows and other analytical measures.c.Separate disclosure of the components of (1) the changein working capital accounts, (2) non-cash income and expense, (3) net assets from consolidation, (4) whether any restructuring charges are included and where they were reported, and (5) debt repaid or reclassified would be useful.。