Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 347- In addition to management, who reviews the system of internal controls for improvements
and modifications necessary because of changing business conditions? - Were there any changes in the internal controls over financial reporting in 2004?
- Who are the independent auditors of CVS?
- Do you think having the chief executive officer and chief financial officer of CVS serve on
its Audit Committee is a good way to foster an effective control environment? - Do members of the management team of CVS serve on the Audit Committee of the Board
of Directors?
The operating activities section of the statement of cash flows for General Motors Corporation
is provided below for three recent years.General Motors Corporation
Operating Activities Section—Statement of Cash Flows (annotated)
For the Years Ended December 31, 2004, 2003, 2002
(in millions)2004 2003 2002
Net income $ 2,805 $ 2,862 $ 1,975
Selected adjustments to reconcile income to net
cash provided by operating activities:
Depreciation and amortization expenses 14,152 13,513 11,569
Pension contributions (13,511) (24,704) (9,490)
Pension and retiree health benefit expense 7,023 8,011 5,888
Change in other operating assets and liabilities (1,628) (2,277) (3,391)
Other 4,220 5,551 4,524
Net cash provided by operating activities $ 13,061 $ 2,956 $11,075A large expense for General Motors is its pension expense. Under pension accounting, the
pension expense is recognized in the period that the pension is earned. However, the company
has latitude regarding the funding of the pension benefit. That is, the expense and the related
cash flow to fund the future benefit need not occur in the same period.- Calculate General Motors’ ratio of cash flow to net income for all three comparative years.
Round to two decimal places. - Interpret the magnitude and year-to-year changes in the ratio.
Estée Lauder Inc.is one of the world’s leading manufacturers and marketers of skin care,
makeup, and hair products. Estée Lauder products are sold in over 130 countries and territories
under such brand names as Clinique, Rodan, Tommy Hilfiger, and Donna Karan. The following
data (in thousands) were taken from the 10-K filings with the Securities and Exchange
Commission for the years ending June 30, 2004 and 2003:2004 2003
Cash flow from operating activities $667,300 $548,500
Net income 342,100 319,800- Compute the ratio of cash flow to net income for 2004 and 2003. Round to one decimal place.
- In 2004, Estée Lauder reported a loss from discontinued operations of $33.3 million. Compute
the ratio of cash flow to net income for 2004 taking into consideration the impact of the dis-
continued operations on net income. Round to one decimal place. - Based upon (2), is the ratio of cash flow to net income comparable between 2004 and 2003?
Best Buyis a specialty retailer of consumer electronics, home office products, entertainment soft-
ware, appliances, and related services. The following data (in millions) were taken from the
10-K filings with the Securities and Exchange Commission for the years ending February 28,
2004, and March 2, 2003:Case 7-4
Ratio of cash flow to net
income
Case 7-5
Ratio of cash flow to net
income
Case 7-6
Ratio of cash flow to net
income