1-There are two methods to constructing the Statement of Cash Flows: the indirect and the direct. What are the differences? Let’s take a look at Best Buy and look at its statement of cashflows, which you can find at its website at http://www.bestbuy.com/. Is the Statement in the indirect or direct format? What pops out to you when you look at the year to year comparison?
2. In reviewing the financial statements of NanoTech Co., you discover that net income increased, while operating cash flows decreased for the most recent two consecutive years.
a. Explain how net income could increase for NanoTech while its operating cash flows decrease. Your answer should include three illustrative examples.
b. Describe how operating cash flows can serve as one indicator of earnings quality.
3. During a meeting of the management committee of Edsel Corporation, a number of proposals are made to alleviate its weak cash position and improve income. Evaluate and comment on both the immediate and long-term effects of the following proposals on the measures indicated. Indicate increase (+), decrease (-), or no effect (NE). Make sure your answer is CLEAR in terms of all items below (1–13) and that you make an entry for EACH column (Net Income, Cash From Operations, and Cash Position).
|1. Substitute stock dividends for cash dividends
|2. Delay needed capital expenditures
|3. Reduce repair and maintenance outlays
|4. Increase the provision for depreciation
|a. For GAAP books only
|b. For tax only
|c. For both GAAP books and tax
|5. Require earlier payment from clients
|6. Delay payment to suppliers and pass up
|7. Borrow money short term
|8. Switch from sum-of-years’-digits to
|straight-line depreciation for books only
|9. Pressure dealers to buy more
|10. Reduce funding of pension plan to minimum
|11. Reduce inventories by implementing a just-in-time
|12. Sell trading securities that have declined by $1,000
|in the current period but are still valued at $3,000
|13. Reissue treasury shares