Financial Accounting: An Integrated Statements Approach, 2nd Edition

628 Chapter 13 Statement of Cash Flows

The manager of the Retailing Division provided the accompanying memo with this report:

From: Senior Vice President, Retailing Division

I am pleased to report that we had earnings of $450,000 over the last period. This resulted

in a return on invested capital of 10%, which is near our target for this division. I have been

aggressive in building the revenue volume in the division. As a result, I am happy to report that

we have increased the number of new credit card customers as a result of an aggressive mar-

keting campaign. In addition, we have found some excellent merchandise opportunities. Some

of our suppliers have made some of their apparel merchandise available at a deep discount. We

have purchased as much of these goods as possible in order to improve profitability. I’m also

happy to report that our vendor payment problems have improved. We are nearly caught up on

our overdue payables balances.

Comment on the senior vice president’s memo in light of the cash flow information.

Todd Manning is the president of Under Wraps, Inc., a chain of sandwich shops. Manning was

meeting with his bank loan officer, Kim Wells. The following conversation took place:

Kim:Todd, I was looking at your income statement and you generated a loss during the last

year. I’m really concerned about this.

Todd:I know, but you also need to look at the statement of cash flows. Our cash flow from

operating activities was positive. Net income is just an accounting number. It’s cash that’s

important. Wouldn’t you agree?

Kim:Well, yes...cash is important. We want you to generate cash so you can pay back our

loan. But your cash from operations, while positive, is not the end of the story.

Todd:What do you mean?

Kim:Well, don’t you need cash for updating and replacing equipment in your shops? I don’t

think that’s part of cash provided from operations.

Todd:I think that’s why the accountant added back the depreciation. With the depreciation

added back, we must be accounting for replacement of productive capacity somehow.

Is Kim’s concern valid? Comment on Todd’s analysis of Kim’s concern.

This activity will require two teams to retrieve cash flow statement information from the Internet.

One team is to obtain the most recent year’s statement of cash flows for Altria Group, Inc., a

tobacco company, and the other team the most recent year’s statement of cash flows for Delta

Air Lines.

The statement of cash flows is included as part of the annual report information that is a re-

quired disclosure to the Securities and Exchange Commission (SEC). The SEC, in turn, provides

this information online through its EDGAR service. EDGAR (Electronic Data Gathering, Analysis,

and Retrieval) is the electronic archive of financial statements filed with the Securities and

Exchange Commission (SEC). SEC documents can be retrieved using the EdgarScan service from

Pricewaterhousecoopers at http://edgarscan.pwcglobal.com.

To obtain annual report information, type in a company name in the appropriate space.

EdgarScan will list the reports available to you for the company you’ve selected. Select the most

recent annual report filing, identified as a 10-K or 10-K405. EdgarScan provides an outline of the

report, including the separate financial statements. You can double-click the income statement

and balance sheet for the selected company into an Excel™ spreadsheet for further analysis.

As a group, compare the two statements of cash flows. How are Altria and Delta similar or

different regarding cash flows?

Activity 13-4

Operating cash flow

Activity 13-5

Statement of cash flows