8.6.1

8.6.1

ACCT:3020 Financial Accounting and Reporting Cash Flow Analysis Case: Refer to the attached Cash Flow Statements for Firm A and Firm B to answer the following questions. Provide all answers for the most recent year unless otherwise specified (the most recent year is on the left for Firm A and on the right for Firm B). Financial statement information other than that provided is not necessary to answer the questions. Basic Concepts: 1) If possible, determine the net change in Accounts Receivable, Inventory, and Accounts Payable over the three-year period presented for each company (you should report only one number for each three-year period). What other working capital accounts have significant changes over the three-year period? Briefly discuss what these changes might imply about working capital management for these firms. 2) What are the significant non-cash or non-operating adjustments these firms made to net income (to derive CFO) during the years presented? Use your judgement to determine what is significant. 3) Identify the major investing and financing transactions for each firm for the three years presented. For each firm, indicate what the primary source of cash flows has been in the years presented. Use your judgement to determine what is major and primary. Basic Analysis: 1) For each firm, compute and interpret the interest coverage ratio (as defined in class) and cash flow adequacy ratio for the most recent year. (Interest Expense for Firm A is $84,566 and for Firm B is $1,417.) 2) For each firm, compute and interpret the quality of earnings ratio for the most recent year. Discuss any weaknesses of the ratio as a measure of the actual quality of earnings. Extended Analysis: 1) Indicate which, if any, of these firms are at risk of having inadequate cash flows to continue operations. Briefly discuss the factors you considered in your analysis. 2) For each of the firms, indicate which phase of the company's life cycle you believe it is in (introduction, growth, maturity, or decline). Briefly discuss the reasons for your conclusion. FIRMA 1999 1998 1997 262 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, Operating Activities Net loss... $ (719,968) $(124,546) $ (31,020) Adjustments to reconcile net loss to net cash provided (used) in operating activities: Depreciation and amortization of fixed assets 36,806 9,421 3,442 Amortization of deferred stock-based compensation 30,618 2,386 1,354 Equity in losses of equity-method investees.. 76,769 2,905 Amortization of goodwill and other intangibles 214,694 42,599 Non-cash merger, acquisition, and investment related costs 8,072 1,561 Non-cash revenue for advertising and promotional services (5,837) Loss on sale of marketable securities 8,688 271 Non-cash interest expense 29,171 23.970 64 Net cash used in operating activities before changes in operating assets and liabilities.... (320,987) (41,433) (26,160) Changes in operating assets and liabilities, net of effects from acquisitions: Inventories ....... (172,069) (20,513) (8,400) Prepaid expenses and other current assets (60,628) (16,758) (3,055) Accounts payable... 330,166 78,674 30,172 Accrued expenses and other current liabilities 65,121 21,615 5,274 Accrued advertising.. 42,382 9,617 2,856 Deferred revenue Interest payable 24,878 (167 Net cash provided by changes in operating assets and liabilities, net of effects from acquisitions.. 230,112 72,468 26,847 Net cash provided (used) in operating activities. (90,875) 31,035 687 Investing Activities: Sales and maturities of marketable securities. 4,024,551 332,084 4,311 Purchases of marketable securities (4.290,173) (546,509) (122,385) Purchases of fixed assets... (287,055) (28,333) (7,603) Acquisitions and investments in businesses, net of cash acquired (369,607) (19,019) Net cash used in investing activities (922,284) (261,777) (125,677) Financing Activities: Proceeds from issuance of capital stock and exercise of stock options 64,469 14,366 53,358 Proceeds from long-term debt 1,263,639 325,987 75,000 Repayment of long-term debt (188,886) (78,108) (47) Financing costs... (35,151) (7,783) (2,309) Net cash provided by financing activities 1,104,071 254,462 126,002 Effect of exchange rate changes 489 (35 Net increase in cash 91,401 23,685 1,012 Cash at beginning of period 25,561 1.876 864 Cash at end of period 116,962 25,561 1,876 Supplemental Cash Flow Information: Fixed assets acquired under capital leases $ $ 3,463 Fixed assets acquired under financing agreements. 5,608 1,500 Stock issued in connection with business acquisitions 774,409 217,241 Equity securities of other companies received for non-cash revenue for advertising and promotional services 54,402 Cash paid for interest, net of amounts capitalized... 59,688 26,629 326 See accompanying notes to consolidated financial statements. 25,850 FIRM B 2018 21,856 10,073 202 15,341 5,418 274 219 441 (20) (1,314) (4,615) 3,263 472 1.151 30,723 CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2016 2017 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 16,175 $ 19,934 $ OPERATING ACTIVITIES: Net income 2,371 3,033 Adjustments to reconcile net income to net cash from operating activities: Depreciation of property and equipment and other amortization, including capitalized content costs 8,116 11,478 Stock-based compensation 2,975 4,215 Other operating expense, net 160 Other expense (income), net (292) Deferred income taxes (246) (29) Changes in operating assets and liabilities: Inventories (1,426) (3.583) Accounts receivable, net and other (3,436) (4.780) Accounts payable 5,030 7,100 Accrued expenses and other 1,724 283 Uneared revenue 1,955 738 Net cash provided by (used in) operating activities 17,203 18,365 INVESTING ACTIVITIES Purchases of property and equipment (7,804) (11,955) Proceeds from property and equipment incentives 1,067 1,897 Acquisitions, net of cash acquired, and other (116) (13,972) Sales and maturities of marketable securities 4,577 9,677 Purchases of marketable securities (7,240) (12,731) Net cash provided by (used in) investing activities (9,516) (27,084) FINANCING ACTIVITIES Proceeds from long-term debt and other 618 16,228 Repayments of long-term debt and other (327) (1,301) Principal repayments of capital lease obligations (3,860) (4,799) Principal repayments of finance lease obligations (147) (200) Net cash provided by (used in) financing activities (3,716) 9,928 Foreign currency effect on cash, cash equivalents, and restricted cash (212) 713 Net increase (decrease) in cash, cash equivalents, and restricted cash 3,759 1.922 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD 19,934 s 21,856 $ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on long-term debt 290 328 $ Cash paid for interest on capital and finance lease obligations 206 319 Cash paid for income taxes, net of refunds 957 Property and equipment acquired under capital leases 5,704 9,637 Property and equipment acquired under build-to-suit leases 1,209 (13,427) 2.104 (2,186) 8,240 (7,100) (12,369) 768 (668) (7.449) (337) (7,686) (351) 10,317 32,173 S 854 575 1.184 10,615 3,641 3,541