Preparing and interpreting the statement of cash flows using a columnar worl

sheet. The accounting records of The GAP, a clothing retailer, for Year 6 and Year 7 indicate the followint! chanaes in its balance sheet accounts (amounts in millions):

Income statement data for The GAP appear below:

a. Prepare a columnar work sheet for the statement of cash flows for Year 6 and Year 7 (see the upper panel of Exhibit 4.4 for the desired format). The GAP sold mar- ketable securities during Year 7 at their book value (that is, at no gain or loss). The firm did not sell property, plant, and equipment during either year. Treat changes in other noncurrent assets as an investing activity.

b. Prepare a statement of cash flows for Year 6 and Year 7 using the indirect method for computing cash flow from operations. The balance in cash was $486 at the end of Year 6 and $914 at the end of Year 7.

c. Compute cash flow from operations for Year 6 and Year 7 using the direct method (see the lower panel of Exhibit 4.4 for the desired format). The GAP includes de- preciation in selling and administrative expenses. Your analysis should show how much cash The GAP collected from customers and how much cash The GAP paid to merchandise suppliers, to governments for income taxes, and to other providers of goods and services.

d. Comment on the pattern of cash flows from operating, investing, and financing ac- tivities.

Transcribed Image Text:

Cash Marketable Securities (current asset) Merchandise Inventories Prepayments Year 6 $ 94 Decrease Year 7 $428 Increase 46 Increase 96 Increase 46 Decrease 154 Increase 1 Increase Property, Plant, and Equipment (at cost) 372 Increase 56 Increase 466 Increase Accumulated Depreciation Other Noncurrent Assets 215 Increase 270 Increase 51 Increase Accounts Payable-Merchandise Suppliers. Notes Payable to Banks (current liability) Income Taxes Payable 114 Increase 18 Increase 15 Increase 134 Increase 45 Increase Other Current Liabilities Bonds Payable Common Stock Retained Earnings 26 Increase 90 Increase 360 Decrease 369 Increase 7 Decrease 123 Increase 577 Increase 524 Decrease 455 Increase