On the facing page is the consolidated statement of cash flows for Telefónica, S.A. (ESP) for the year ended December 31, 2008 and 2009.

Instructions
(a) What method does Telefónica use to prepare the operating cash flows section of its statement of cash flows? Briefly discuss how you can determine this.
(b) Telefónica reported net income of ‚¬7,937 in 2009 and ‚¬7,826 in 2008 (in millions). Briefly discuss some f the adjustments that would explain such a difference in its income and operating cash flows.
(c) IFRS requires disclosure of interest, taxes, and dividends. Briefly describe how Telefónica has complied with these requirements. What other approach could a company take to comply with the reportingrequirement?

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(Millions of euros) Cash flows from operating activities 2009 2008 Cash received from customers Cash paid to suppliers and employees Dividends received Net interest and other financial expenses paid Taxes paid 67,358 (46,198) 100 (2,170) (2,942) 16,148 69,060 (48,500) 113 (2,894) (1,413) 16,366 Net cash from operating activities Cash flows from investing activities Proceeds on disposals of property, plant, and equipment and 276 (7,889) 686 (2,178) 31 (114) 76 intangible assets Payments on investments in property, plant and equipment and 242 (7,593) 34 (48) intangible assets Proceeds on disposals of companies, net of cash and cash equivalents disposed Payments on investments in companies, net of cash and cash equivalents acquired Proceeds on financial investments not included under cash equivalents Payments made on financial investments not included under cash equivalents Interest (paid) received on cash surpluses not included under 1,411) (548) (9,300) cash equivalents Government grants received Net cash used in investing activities Cash flows from financing activities (9,101) Dividends paid Transactions with equity holders Proceeds on issue of debentures and bonds Proceeds on loans, borrowings and promissory notes Cancellation of debentures and bonds Repayments of loans, borrowings and promissory notes (4,440) (2,241) 1,317 3,693 (1,167) 5,494)(4,927) (7,765) (4,838) (947) 8,617 2,330 (1,949) Net cash flow used in financing activities Effect of foreign exchange rate changes on collections Effect of changes in consolidation methods and other Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 2,281) (302) and payments non-monetary effects during the period 269 4,836 4,277 9,113 (788) 5,065 4,277