Solutions Manual

CHAPTER 13

CASH FLOW ANALYSIS

SUGGESTED ANSWERS TO THE REVIEW QUESTIONS AND PROBLEMS

I. Questions

1. The only way depreciation generates cash flows for the company is by
serving as a tax shield against reported income. This non-cash deduction
may provide cash flow equal to the tax rate times the depreciation
charged. This much in taxes will be saved, while no cash payments
occur.

2. Refer to pages 278 through 280.

3. Refer to pages 277 and 278.

II. Multiple Choice Questions

1. D 5. A 9. C 13. A
2. C 6. B 10. A 14. B
3. D 7. A 11. B 15. A
4. D 8. D 12. D 16. D

III. Problems

Problem 1 (Statement of Cash Flows)

Cash flow from

Operating activities (817,000) Outflow
Investing activities (2,567,000) Outflow
Financing activities 3,459,000 Inflow
Increase in Cash 75,000

Cash balance, beginning 950,000

Cash balance, end 1,025,000
Increase in Cash 75,000

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Chapter 13 Cash Flow Analysis

Note: The problem did not indicate whether the cash flows from investing
and financing activities represented net inflow or outflow. It is assumed that
following normal course of operations, investments will represent usage or
outflow of cash and financing will represent sourcing or inflow of cash.
Hence since the cash account posted a net increase of 75,000, operating
activities must have used up a net cash flow of 817,000.

Problem 2 (Free Cash Flow)

EBIT 62,000,000
Less: Taxes 17,000,000
EAT 45,000,000
Add: Depreciation 5,000,000
Operating Cash Flow 50,000,000

Free Cash Flow = Operating cash flow Investment in operating capital

= 50,000,000 [32,000,000 + (20,000,000 12,000,000)]
Free Cash Flow = 50,000,000 40,000,000 = 10,000,000

Problem 3 (Free Cash Flow)

Free Cash Flow = Operating cash flow Investment in operating capital
23,000,000 = OCF 13,000,000
OCF = 36,000,000

EBIT 45,000,000
Less: Taxes 17,000,000
EAT 28,000,000
Add: Depreciation 8,000,000
Operating Cash Flow 36,000,000

Problem 4 (Statement of Cash Flows)

Notes payable, beginning 208,000,000
Payment 23,000,000
Notes payable, end 185,000,000

Problem 5 (Free Cash Flow)

Problem 6 (Free Cash Flow)

Problem 7 (Working with Financial Statements)

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