Interpreting the Statement of Cash Flows Following is the statement of cash flow
ID: 2488447 • Letter: I
Question
Interpreting the Statement of Cash Flows Following is the statement of cash flows for Wal-Mart Stores, Inc. P2-43. (LO1) Wal-Mart (WMT) WAL-MART STORES, INC Statement of Cash Flows For Year Ended January 31, 2013 (S millions) Cash flows from operating activities Income from continuing operations ..............__...... Adjustments to reconcile income from continuing operations to net cash provided by b 17,756 operating activities: Depreciation and amortization . . Deferred income taxes Other operating activities Changes in certain assets and liabilities, net of effects of acquisitions: 8,501 (133) 527 Receivables, net . Accounts payable . Accrued income taxes (614) (2,759) 1,061 271 981 Net cash provided by operating activities . . . . . . . Cash flows from investing activities (12,898) Payments for property and equipment... Proceeds from the disposal of property and equipment Investments and business acquisitions, net of cash acquired........ . . . . 532 (316) 71 . . Net cash used in investing activities (12,611) continuedExplanation / Answer
ANSWER A: why is depreciation added back to compute net cash flows from operating activities?
Cash Flow Statement (CFS) is bascially prepared to understand the amount of cash we earned and where it was utilised during the year. Since depreciation does not amount to a capital spending i.e. there is NO cash outflow, depreciation is adjusted/added back while calculating cash flows from operating activities. In other words, depreciation does not affect the cash account but affects the income account (by reducing it), therefore depreciation needs to be added back to the income to calculate the Cash Profit earned by the company.
ANSWER B: (i) Increase in recieveables and inventories reported as cash outflow?
An increase in recievables means that the company is not being able to realise its payments on time and it has a lot of cash blocked in its debtors.Cash does not increase until the money is realised from its debtors and the company may start struggling in paying off its bills. Therefore, its shown as a cash outflow.
An increase in inventories is shown as a cash outlfow because it means that the company has brought more invetory than what is has been able to sell. Therefore, there iis more outflow of cash on account of purchase than on sale.
(ii) Why do accounts payable and accrued liabilities provide a source of cash?
When company purchases goods from the supplier, the supplier ususally offers a credit period/deferred payment system because of which there is no immediate outflow of cash from the company. A longer credit period means company is being able to maximising its trade credit by delaying its cash outflows and taking full advantage of each penny.
ANSWER C: It is appopriate for Walmart to make such expenditure since Its capital expenditure ratio comes out to 50.4% ( 12898 / 25591).
Relationship- Increase in PPE increases the depreciation.
ANSWER D: Wal-Mart can earn more by using its cash into business than returning to shareholders,Wal-Mart should choose not repurchase common stock or dividends. It can re invest $ 12961 in its business to gain furthur cash profits.
ANSWER E: Wal-Mart has $17756 net income and $25591 operating cash. The operating cash is more than net income. Also, it invested $12898 in capital expenditures, which is 72%of net income. Therefore it is a profitable and strong company.
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