PROBLEM 7–8 The statement of cash flows for Lands’ End is reproduced here: CASE 7–1 LANDS’ END, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows FOR PERIOD ENDED

($ in thousands) Year 9 Year 8 Year 7 Cash flows from operating activities Net income........................................................................ $ 31,185 $ 64,150 $ 50,952 Adjustments to reconcile net income to net cash flows from operating activities—

Pretax non-recurring charge.......................................... 12,600 — —

Depreciation and amortization ...................................... 18,731 15,127 13,558 Deferred compensation expense.................................... 653 323 317 Deferred income taxes................................................... (5,948) (1,158) 994 Pretax gain on sale of subsidiary................................... — (7,805) —

Loss on disposal of fixed assets.................................... 586 1,127 325 Changes in assets and liabilities excluding effects of divestitures Receivables .......................................................... (5,640) (7,019) (675)

Inventory .............................................................. 21,468 (104,545) 22,371 Prepaid advertising .............................................. (2,844) (7,447) 4,758 Other prepaid expenses........................................ (2,504) (1,366) (145)

Accounts payable ................................................. 4,179 11,616 14,205 Reserve for returns............................................... 1,065 944 629 Accrued liabilities ................................................ 6,993 8,755 4,390 Accrued profit sharing.......................................... (2,030) 1,349 1,454 Income taxes payable........................................... (5,899) (1,047) 8,268 Other ............................................................................. 1,665 64 394 Net cash flows from (used for) operating activities................ 74,260 (26,932) 121,795 Cash flows from (used for) investing activities Cash paid for capital additions ......................................... (46,750) (47,659) (18,481)

Proceeds from sale of subsidiary ....................................... — 12,350 —

Net cash flows used for investing activities........................... (46,750) (35,309) (18,481)

Cash flows from (used for) financing activities Proceeds from short-term debt ........................................... 6,505 21,242 1,876 Purchases of treasury stock............................................... (35,557) (45,899) (30,143)

Issuance of treasury stock................................................. 1,845 409 604 Net cash flows used for financing activities .......................... (27,207) (24,248) (27,663)

Net increase (decrease) in cash and cash equiv.................... $ 303 $ (86,489) $ 75,651 Beginning cash and cash equivalents ................................... 6,338 92,827 17,176 Ending cash and cash equivalents........................................ $ 6,641 $ 6,338 $ 92,827 Required:

a. Lands’ End recently implemented a strategy of filling nearly all orders when the order is placed. In what year do you believe the company implemented this strategy and how is the strategy reflected in the information contained in the statement of cash flows?

b. Explain how the following items reconcile net income to net cash flows from operating activities:
(1) Depreciation (2) Receivables (3) Inventory (4) Reserve for returns

c. Calculate free cash flows for each year shown.

d. How does Lands’ End use its free cash flow? Do you think its use of free cash flows reflects good financial strategy?