Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and other data are reproduced on the next page.

PHILIP MORRIS PURCHASE OF KRAFT
Allocation of Purchase Price ($ millions)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 758
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,232
Property, plant, and equipment. . . . . . . . . . . . . . . . . . . . . . 1,740
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,361
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (578)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (530)
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (900)
Purchase price (net of cash acquired) . . . . . . . . . . . . . . . . $11,383

Required:
a. Prepare a statement of cash flows (indirect method) for Philip Morris. (Hint: Acquisition of Kraft requires you to remove the assets acquired and liabilities incurred as a result of that acquisition from the balance sheet before computing changes used in preparing the statement of cash flows. Philip Morris pays $11.383 billion for Kraft, net of cash acquired-see the Allocation of Purchase Price table.)
b. Calculate cash flows from operations using the direct method for Philip Morris.
c. Based on your answer to a, compute Philip Morris's free cash flow for Year 8. Discuss how free cash flow impacts the company's future earnings and financialcondition.

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PHILIP MORRIS COMPANIES, INC Balance Sheets (S millions) December 31, Year 8 and Year 7 Year 8 Year 7 Assets Cash and cash equivalents.... Accounts receivable Inventories $168 $ 90 2,222 2,065 4,154 6,309 6,582 4,052 3,665 5,384 7,774 8,648 15,071 3,260 Current assets Property, plant, and equipment, net Goodwill, neft Investments Total assets $34,753 $20,608 Liabilities and Stockholders' Equity Short-term debt Accounts payable Accrued liabilities Income taxes payable. … Dividends payable 1,259 1,440 791 3,848 2,277 727 260215 5,448 6,293 1,719 2,044 6,823 Total liabilities and stockholders' equity.. . . $34,753 $20,608 1,777 1,089 8,233 17,122 Current liabilities Long-term debt.. Deferred income taxes Stockholders' equity 7,679 PHILIP MORRIS COMPANIES, INC Income Statement ($ millions) For Year Ending December 31, Year 8 Sales Cost of goods sold Selling and administrative expenses Depreciation expense Goodwill amortization Interest expense Pretax income Income tax expense. Net income 31,742 (12,156) (14,410) (654) (125) (670) 3,727 (1,390) S 2,337