Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 13 Statement of Cash Flows 611

In addition, the sales and cost of merchandise sold for each company were reported for 2004 as

follows (in millions):

Home Depot Inc. Lowe’s Inc.

Sales $73,094 $36,464

Cost of merchandise sold 48,664 24,165

a. Calculate the cash conversion cycle for Home Depot and Lowe’s. Round your calculations

to the nearest whole day.

b. Interpret your results.

The comparative current assets and current liabilities for Robert Mondavi Corp., a major

California winery, are provided as follows:

Exercise 13-26

Cash conversion cycle

Goal 4

Exercise 13-27

Free cash flow

Goals2, 4

Exercise 13-28

Free cash flow

Goal 4

Robert Mondavi Corp.

Selected Balance Sheet Information

(in thousands) June 30, 2004 June 30, 2003

Current assets:

Cash and cash equivalents $ 48,960 $ 1,339

Accounts receivable, net 94,549 96,111

Inventories 387,940 392,635

Prepaid expenses and other current assets 7,025 12,545

Total current assets $538,474 $502,630

Current liabilities:

Accounts payable $ 26,037 $ 28,727

Other accrued expenses 37,565 33,419

Current portion of long-term debt 18,910 9,837

Total current liabilities $ 82,512 $ 71,983

The income statements indicated sales were $491,957 and the cost of goods sold was $283,849

for the fiscal year ended 2004 (in thousands).

a. Determine the cash conversion cycle for the fiscal year ending 2004. Round to the nearest

whole day.

b. Interpret your results.

Hacienda Tile Company has 100,000 shares of common stock issued and outstanding and 1,000

shares of 8%, $100 par value preferred stock issued and outstanding. Hacienda had cash flows

from operating activities of $120,000. Cash flows used for investments in property, plant, and

equipment totaled $45,000, of which 60% of this investment was used to replace existing capac-

ity. A cash dividend of $0.20 per share was declared and paid on common stock.

Determine the free cash flow for Hacienda Tile Company.

The following information was available from selected financial statements of Paradise Hotels, Inc.:

Net income $2,400,000

Depreciation expense 320,000

Cash flows provided by operating activities 3,000,000

Dividends paid 575,000

Cash used to purchase and improve fixed assets 510,000

Interest expense 52,000

Cash used to repay bank loans 225,000

Assume that the present capacity of the hotel chain can be maintained by investing an amount

equal to 150% of depreciation expense. Determine Paradise Hotel’s free cash flow.