Interpreting the statement of cash flows. Exhibit 13.17 presents a statement of cash flows for L.A. Gear, manufacturer of athletic shoes and sportswear, for three recent years.

a. What is the likely reason for the negative cash flow from operations?

b. How did L.A. Gear finance the negative cash flow from operations during each of the three years? Suggest reasons for L.A. Gear's choice of financing source for each year.

c. Expenditures on property, plant, and equipment substantially exceeded the addback for depreciation expense each year. What is the likely explanation for this difference in amounts?

d. The addback for depreciation expense is a relatively small proportion of net income. What is the likely explanation for this situation?

e. L.A. Gear had no long-term debt in its capital structure during Year 7 through Year 9 . What is the likely explanation for such a financial structure?

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EXHIBIT 13.17 L.A. GEAR Statement of Cash Flows (all dollar amounts in thousands) (Problem 17) OPERATIONS Net Income Depreciation Noncash Compensation to Employees Increase in Accounts Receivable Increase in Inventories Increase in Prepayments Increase in Accounts Payable Increase (Decrease) in Other Current Liabilities Cash Flow from Operations INVESTING Sale of Marketable Securities Acquisition of Property, Plant, and Equipment Acquisition of Other Noncurrent Assets Cash Flow from Investing Year 8 Year 9 Year 10 $ 4,371 $ 22,030 $ 55,059 133 446 1,199 - - 558 (12,410) (34,378) (51,223) (1,990) (50,743) (72,960) (599) (2,432) (8,624) 1,656 7,197 17,871 (537) 11,193 10,587 $ (9,376) $(46,687) $(47,533) $ 5,661 (874) (241) $ (2,546) (406) $ (6,168) (246) $ 4,546 $ (2,952) $ (6,414) FINANCING Increase (Decrease) in Short-term Borrowing $ 4,566 $ 50,104 Issue of Common Stock Cash Flow from Financing Change in Cash Cash, Beginning of Year Cash, End of Year $ 4,566 $ (264) 3,509 $ 3,245 495 $ 50,599 $ 960 3,245 $ 4,205 $(19,830) 69,925 $ 50,095 $ (3,852) 4,205 $ 353