Interpreting direct and indirect methods Refer to Exhibit 5.39 for Fierce Fighters Corporation, which shows excerpts from its Statements of Cash Flows, with cash flow from operations presented with the indirect method for three recent year We use these years to illustrate a period of successively decreasing cash flows from operations The columns labeled Change and shaded gray do not appear in the original.
a. Using Exhibit 5.39, write a short (no more than 50 words) explanation of why Fierce Fighters€™ cash flow from operations declined by about 20% per year between 2006 and 2007 and then again between 2007 and 2008. If you cannot explain, then suggest why that might be.

b. Now refer to Exhibit 5.40 for Fierce Fighters, which shows excerpts from its Statements of Cash Flows, with cash flow from operations presented with the direct method. for the same three years as in part a. Write a short (no more than 50 words) explanation of why Fierce Fighter€™s cash flow from operations declined by about 20% per year between 2006 and 2007 and then again between 2007 and 2008. If you cannot explain, then suggest why that might be.

c. Which method of presenting cash flow from operations do you find easier tointerpret?

Transcribed Image Text:

Fierce Fighters Corporation Data Taken from Consolidated Statements of Cash Flows (Shaded Columns Showing Changes Do Not Appear in Original) (all dollar amounts in millions) EXHIBIT 5.39 Indirect Method 2008 Years ended December 31 2007 2006 Cash Provided by Operating Activities Change Change $ 608 $ 427 (181) $ 467 Net Income . 141 Adjustments to Reconcile Net Income to Net Cash Provided by Operations: Depreciation... Amortization of Intangible Assets Common Stock Issued to Employees.. Loss on Disposal of Discontinued Operations ... Loss (Gain) on Disposals of Property, Plant, and Equipment . Retiree Benefits Income... Decrease (Increase) in (18) 266 91 175 193 206 379 173 10 196 46 38 (56) 56 56 (7) (20) (8) 13 21 (269) (492) (243) (249) 223 Accounts Receivable... (679) (849) 1,273 1,952 170 Inventoried Costs.... (28) (105) (95) 77 172 Prepaid Expenses and Other Current Assets (28) (73) 17 45 45 Increase (Decrease) in Advances from Customers on Long-Term Contracts Accounts Payable and Accruals (1,314) (648) 666 645 21 (696) (65) (783) (2) 87 89 Provisions for Contract Losses (85) (8) 20 28 Deferred Income Taxes (171) 174 345 115 230 Income Taxes Payable. (13) (75) (41) (30) 28 58 (129) Retiree Benefits (92) 17 37 Other Noncash Transaction (8) 36 24 12 20 Net Cash Provided by Operating Activities . $ 817 (193) (197) $1,010 $1,207 The changes are from right to left, from 2006 to 2007 and from 2007 to 2008. Each number in a change column is the difference: number to the left of the change minus the number to the right of the change.