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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