Cash Flow Analysis Case:

Refer to the attached Cash Flow Statements for Firm A and Firm B to answer the following questions. 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 judgment 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 judgment to determine what is major and primary.

Basic Analysis:

1. For each firm, compute and interpret the interest coverage ratio and cash flow adequacy ratio for the most recent year (as defined in the Class 14 slides). (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 (as defined in the Class 14 slides). 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 companys life cycle you believe it is in (introduction, growth, maturity, or decline). Briefly discuss the reasons for your conclusion.

Firm A YEARS ENDED DECEMBER 31, 1999 1998 1997 $ (719, 968) $(124,546) $ (31,020) 3,442 1,354 OPERATING ACTIVITIES: Net loss..... ... Adjustments to reconcile net loss to net cash provided (used) in operating activities: Depreciation and amortization of fixed assets... Amortization of deferred stock-based compensation...... Equity in losses of equity-method investees. Amortization of goodwill and other intangibles.... Non-cash merger, acquisition, and investment related costs...... Non-cash revenue for advertising and promotional services..... Loss on sale of marketable securities. Non-cash interest expense........... 36,806 30,618 76,769 214, 694 9,421 2,386 2,905 42,599 8,072 1,561 (5,837) 8,688 29,171 271 23,970 (320,987) (41, 433) (26,160) Net cash used in operating activities before changes in operating assets and liabilities......... Changes in operating assets and liabilities, net of effects from acquisitions: Inventories.......................... Prepaid expenses and other current assets.. Accounts payable........ Accrued expenses and other current liabilities. .. Accrued advertising..... Deferred revenue.... Interest payable........ (172,069) (60,628) 330,166 65, 121 42,382 262 24,878 (20,513) 016, 758) 78, 674 21, 615 9, 617 (8,400) (3,055) 30,172 5,274 2,856 (167) --------- Net cash provided by changes in operating assets and liabilities, net of effects from acquisitions........ 230, 112 72,468 26,847 (90,875) 31,035 687 Net cash provided (used) in operating activities..... INVESTING ACTIVITIES: Sales and maturities of marketable securities... Purchases of marketable securities.. Purchases of fixed assets.... Acquisitions and investments in businesses, net of cash acquired... 4,024, 551 (4,290, 173) (287,055) 332,084 (546,509) (28,333) 4.311 (122,385) (7,603) (369, 607) (19,019) (922,284) (261,777) (125, 677) Net cash used in investing activities....... FINANCING ACTIVITIES: Proceeds from issuance of capital stock and exercise of stock options... Proceeds from long-term debt.. Repayment of long-term debt... Financing costs... 64,469 1,263, 639 (188,886) (35,151) 14,366 325,987 (78,108) 17,783) 53, 358 75,000 (47) (2,309) 1,104,071 126,002 Net cash provided by financing activities.... Effect of exchange rate changes......... 254, 462 (35) 489 Net increase in cash............................ Cash at beginning of period....... 91,401 25, 561 23, 685 1,876 1,012 864 Cash at end of period.... $ 116, 962 $ 25,561 $ 1,876 $ $ -- $ SUPPLEMENTAL CASH FLOW INFORMATION: Fixed assets acquired under capital leases..... ...... Fixed assets acquired under financing agreements........... Stock issued in connection with business acquisitions...... Equity securities of other companies received for non-cash revenue for advertising and promotional services... Cash paid for interest, net of amounts capitalized......... 25,850 5,608 774,409 3, 463 1,500 217,241 54,402 59, 688 26,629 326 See accompanying notes to consolidated financial statements. Table of Contents Firm B CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2017 $ 19,934 $ 2018 2016 16.175 21,856 2,371 3,033 1 0,073 8,116 2,975 15,341 5,418 160 11.478 4,215 202 (292) (29) 274 219 (20) (246) 441 (1,426) (3.436) 5,030 1,724 1,955 17,203 (9,583) (4,780) 7,100 283 738 18,365 (1.314) (4,615) 3,263 472 1,151 30,723 (11,955) 1.897 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation of property and equipment and other amortization, including capitalized content costs Stock-based compensation Other operating expense, net Other expense (income), net Deferred income taxes Changes in operating assets and liabilities: Inventories Accounts receivable, net and other Accounts payable Accrued expenses and other Unearned revenue Net cash provided by (used in) operating activities INVESTING ACTIVITIES. Purchases of property and equipment Proceeds from property and equipment incentives Acquisitions, net of cash acquired, and other Sales and maturities of marketable securities Purchases of marketable securities Net cash provided by (used in) investing activities FINANCING ACTIVITIES: Proceeds from long-term debt and other Repayments of long-term debt and other Principal repayments of capital lease obligations Principal repayments of finance lease obligations Net cash provided by (used in) financing activities Foreign currency effect on cash, cash equivalents, and restricted cash Net increase (decrease) in cash, cash equivalents, and restricted cash CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on long-term debt Cash paid for interest on capital and finance lease obligations Cash paid for income taxes, net of refunds Property and equipment acquired under capital leases Property and equipment acquired under build-to-suit leases (7.804) 1,067 (116) 4,377 (7.240) (13,427) 2,104 (2,186) (13.972) 9,677 8,240 (9,516) (12,731) (27.084) (7,100) (12,369) S 768 618 (327) (3.860) (147) (3,716) (212) 3,759 19,934 16,228 (1,301) (4,799) (200) 9,928 (668) (7.449) (337) (7,686) (351) 10.317 32,173 713 1,922 21,856 $ S S 328 S 290 206 412 5,704 1,209 319 957 854 575 1,184 10,615 3,641 9,637 3,541 See accompanying notes to consolidated financial statements. 36 Firm A YEARS ENDED DECEMBER 31, 1999 1998 1997 $ (719, 968) $(124,546) $ (31,020) 3,442 1,354 OPERATING ACTIVITIES: Net loss..... ... Adjustments to reconcile net loss to net cash provided (used) in operating activities: Depreciation and amortization of fixed assets... Amortization of deferred stock-based compensation...... Equity in losses of equity-method investees. Amortization of goodwill and other intangibles.... Non-cash merger, acquisition, and investment related costs...... Non-cash revenue for advertising and promotional services..... Loss on sale of marketable securities. Non-cash interest expense........... 36,806 30,618 76,769 214, 694 9,421 2,386 2,905 42,599 8,072 1,561 (5,837) 8,688 29,171 271 23,970 (320,987) (41, 433) (26,160) Net cash used in operating activities before changes in operating assets and liabilities......... Changes in operating assets and liabilities, net of effects from acquisitions: Inventories.......................... Prepaid expenses and other current assets.. Accounts payable........ Accrued expenses and other current liabilities. .. Accrued advertising..... Deferred revenue.... Interest payable........ (172,069) (60,628) 330,166 65, 121 42,382 262 24,878 (20,513) 016, 758) 78, 674 21, 615 9, 617 (8,400) (3,055) 30,172 5,274 2,856 (167) --------- Net cash provided by changes in operating assets and liabilities, net of effects from acquisitions........ 230, 112 72,468 26,847 (90,875) 31,035 687 Net cash provided (used) in operating activities..... INVESTING ACTIVITIES: Sales and maturities of marketable securities... Purchases of marketable securities.. Purchases of fixed assets.... Acquisitions and investments in businesses, net of cash acquired... 4,024, 551 (4,290, 173) (287,055) 332,084 (546,509) (28,333) 4.311 (122,385) (7,603) (369, 607) (19,019) (922,284) (261,777) (125, 677) Net cash used in investing activities....... FINANCING ACTIVITIES: Proceeds from issuance of capital stock and exercise of stock options... Proceeds from long-term debt.. Repayment of long-term debt... Financing costs... 64,469 1,263, 639 (188,886) (35,151) 14,366 325,987 (78,108) 17,783) 53, 358 75,000 (47) (2,309) 1,104,071 126,002 Net cash provided by financing activities.... Effect of exchange rate changes......... 254, 462 (35) 489 Net increase in cash............................ Cash at beginning of period....... 91,401 25, 561 23, 685 1,876 1,012 864 Cash at end of period.... $ 116, 962 $ 25,561 $ 1,876 $ $ -- $ SUPPLEMENTAL CASH FLOW INFORMATION: Fixed assets acquired under capital leases..... ...... Fixed assets acquired under financing agreements........... Stock issued in connection with business acquisitions...... Equity securities of other companies received for non-cash revenue for advertising and promotional services... Cash paid for interest, net of amounts capitalized......... 25,850 5,608 774,409 3, 463 1,500 217,241 54,402 59, 688 26,629 326 See accompanying notes to consolidated financial statements. Table of Contents Firm B CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2017 $ 19,934 $ 2018 2016 16.175 21,856 2,371 3,033 1 0,073 8,116 2,975 15,341 5,418 160 11.478 4,215 202 (292) (29) 274 219 (20) (246) 441 (1,426) (3.436) 5,030 1,724 1,955 17,203 (9,583) (4,780) 7,100 283 738 18,365 (1.314) (4,615) 3,263 472 1,151 30,723 (11,955) 1.897 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation of property and equipment and other amortization, including capitalized content costs Stock-based compensation Other operating expense, net Other expense (income), net Deferred income taxes Changes in operating assets and liabilities: Inventories Accounts receivable, net and other Accounts payable Accrued expenses and other Unearned revenue Net cash provided by (used in) operating activities INVESTING ACTIVITIES. Purchases of property and equipment Proceeds from property and equipment incentives Acquisitions, net of cash acquired, and other Sales and maturities of marketable securities Purchases of marketable securities Net cash provided by (used in) investing activities FINANCING ACTIVITIES: Proceeds from long-term debt and other Repayments of long-term debt and other Principal repayments of capital lease obligations Principal repayments of finance lease obligations Net cash provided by (used in) financing activities Foreign currency effect on cash, cash equivalents, and restricted cash Net increase (decrease) in cash, cash equivalents, and restricted cash CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on long-term debt Cash paid for interest on capital and finance lease obligations Cash paid for income taxes, net of refunds Property and equipment acquired under capital leases Property and equipment acquired under build-to-suit leases (7.804) 1,067 (116) 4,377 (7.240) (13,427) 2,104 (2,186) (13.972) 9,677 8,240 (9,516) (12,731) (27.084) (7,100) (12,369) S 768 618 (327) (3.860) (147) (3,716) (212) 3,759 19,934 16,228 (1,301) (4,799) (200) 9,928 (668) (7.449) (337) (7,686) (351) 10.317 32,173 713 1,922 21,856 $ S S 328 S 290 206 412 5,704 1,209 319 957 854 575 1,184 10,615 3,641 9,637 3,541 See accompanying notes to consolidated financial statements. 36