$3\mathrm{.}23$ Interpreting the Statement of Cash Flows. Sunbeam Corporation manu$-$ factures and sells a variety of small household appliances, including toasters, food processors, and waffle grills. Exhibit $3\mathrm{.}21$ presents a statement of cash flows for Sunbeam for Year $5,$ Year $6,$ and Year $7.$ After

LO $3-5$

Exhibit $3\mathrm{.}21$

Sunbeam Corporation Statement of Cash Flows $($amounts in millions$)($Problem $3\mathrm{.}23)$

Year $7$

Year $6$

Year $5$

OPERATIONS

Net income $($loss$)$

Depreciation and amortization Restructuring and asset impairment charges Deferred income taxes

Other additions

$ $109\mathrm{.}438\mathrm{.}657\mathrm{.}813\mathrm{.}7$

$$(228\mathrm{.}3)47\mathrm{.}4283\mathrm{.}7(77\mathrm{.}8)46\mathrm{.}2$

$ $50\mathrm{.}544\mathrm{.}225\mathrm{.}110\mathrm{.}8$Exhibit $3\mathrm{.}21($Continued$)$

Year $7$

Year $6$

Year $5$

Other subtractions

$($Increase$)$ Decrease in accounts receivable $($Increase$)$ Decrease in inventories

$($Increase$)$ Decrease in prepayments

Increase $($Decrease$)$ in accounts payable Increase $($Decrease$)$ in other current liabilities

Cash Flow from Operations INVESTING

Fixed assets acquired

Sale of businesses Acquisitions of businesses

Cash Flow from Investing

FINANCING

Increase $($Decrease$)$ in short$-$term borrowing Increase in long$-$term debt

Issue of common stock

Decrease in long$-$term debt

Acquisition of common stock

Dividends

Other financing transactions

Cash Flow from Financing

Change in Cash

Cash$$Beginning of year

Cash$$End of Year

$(84\mathrm{.}6)(27\mathrm{.}1)$

$(84\mathrm{.}6)(13\mathrm{.}8)(100\mathrm{.}8)(11\mathrm{.}6)(9\mathrm{.}0)2\mathrm{.}7(1\mathrm{.}6)14\mathrm{.}752\mathrm{.}8(21\mathrm{.}9)$ $ $(8\mathrm{.}3)$ $ $14\mathrm{.}2$

$ $(58\mathrm{.}3)$ $ $(75\mathrm{.}3)91\mathrm{.}0(\mathrm{.}9)$ $ $32\mathrm{.}7$ $ $(76\mathrm{.}2)$

$ $5\mathrm{.}0$ $ $30\mathrm{.}011\mathrm{.}526\mathrm{.}69\mathrm{.}2(12\mathrm{.}2)(1\mathrm{.}8)(3\mathrm{.}4)(3\mathrm{.}3)0\mathrm{.}5(\mathrm{.}4)$ $ $16\mathrm{.}5$ $ $45\mathrm{.}2$ $ $40\mathrm{.}9$ $ $(16\mathrm{.}8)11\mathrm{.}528\mathrm{.}3$ $ $52\mathrm{.}4$ $ $11\mathrm{.}5$

$

$(21\mathrm{.}7)(4\mathrm{.}5)(4\mathrm{.}9)(8\mathrm{.}8)9\mathrm{.}2(18\mathrm{.}4)81\mathrm{.}5$

$ $(140\mathrm{.}1)65\mathrm{.}3(33\mathrm{.}0)$ $ $(107\mathrm{.}4)$

$ $

$

$ $40\mathrm{.}09\mathrm{.}8(5\mathrm{.}4)(13\mathrm{.}0)(3\mathrm{.}3)(\mathrm{.}2)27\mathrm{.}92\mathrm{.}026\mathrm{.}328\mathrm{.}3$

Source: Sunbeam Corporation, Form $10-$K for the Fiscal Year Ended $1997.$

LO $3-5$

experiencing decreased sales in Year $5,$ Sunbeam hired Albert Dunlap in Year $6$ to turn the company around. Albert Dunlap, known in the industry as $$Chainsaw Al$,$ had previously directed restructuring efforts at Scott Paper Company. The restructuring effort at Sunbeam generally involved firing employees and cutting costs aggressively. Most of these restructuring efforts took place during Year $6.$ The market expected significantly improved results in Year $7.$ Reported sales increased $18\mathrm{.}7\%$ between Year $6$ and Year $7,$ and net income improved. However, subsequent revelations showed that almost half of the sales increase resulted from fraudulent early recognition of revenues in the fourth quarter of Year $7$ that the firm should have recognized in the first quarter of Year $8.$ Growth in revenues for Years $5,6,$ and $7$ was $22\mathrm{.}6\%,23\mathrm{.}2\%,$ and $18\mathrm{.}7\%,$ respectively.

REQUIRED

a$.$ UsingtheinformationprovidedandthestatementofcashflowsforYear$5$inExhibit$3\mathrm{.}21,$identify any signals that Sunbeam was experiencing operating difficulties and was in need of restructuring.

b$.$ Using information in the statement of cash flows for Year $6,$ identify indicators of the turnaround

efforts and any relations among cash flows that trouble you.

c$.$ UsinginformationinthestatementofcashflowsforYear$7,$indicateanysignalsthatthefirm

might have engaged in aggressive revenue recognition and had not yet fixed its general operating problems.