Chapter 13 - Answer

Solutions Manual

CHAPTER 13 CASH FLOW ANALYSIS SUGGESTED ANSWERS TO THE REVIEW QUESTIONS AND PROBLEMS I. Questions 1. The only way depreciation generates cash flows for the company is by serving as a tax shield against reported income. This non-cash deduction may provide cash flow equal to the tax rate times the depreciation charged. This much in taxes will be saved, while no cash payments occur. 2. Refer to pages 278 through 280. 3. Refer to pages 277 and 278. II. Multiple Choice Questions 1. 2. 3. 4.

D C D D

5. 6. 7. 8.

A B A D

9. 10. 11. 12.

C A B D

13. 14. 15. 16.

A B A D

III. Problems Problem 1 (Statement of Cash Flows) Cash flow from Operating activities Investing activities Financing activities Increase in Cash

₱(817,000) Outflow (2,567,000) Outflow 3,459,000 Inflow ₱ 75,000 ₱ 950,000 1,025,000 ₱ 75,000

Cash balance, beginning Cash balance, end Increase in Cash

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Chapter 13

Cash Flow Analysis

Note: The problem did not indicate whether the cash flows from investing and financing activities represented net inflow or outflow. It is assumed that following normal course of operations, investments will represent usage or outflow of cash and financing will represent sourcing or inflow of cash. Hence since the cash account posted a net increase of ₱75,000, operating activities must have used up a net cash flow of ₱817,000. Problem 2 (Free Cash Flow) ₱62,000,000 17,000,000 ₱45,000,000 5,000,000 ₱50,000,000

EBIT Less: Taxes EAT Add: Depreciation Operating Cash Flow

Free Cash Flow = Operating cash flow – Investment in operating capital = ₱50,000,000 – [₱32,000,000 + (₱20,000,000 − ₱12,000,000)] Free Cash Flow = ₱50,000,000 − ₱40,000,000 = ₱10,000,000 Problem 3 (Free Cash Flow) Free Cash Flow = Operating cash flow – Investment in operating capital ₱23,000,000 = OCF − ₱13,000,000 OCF = ₱36,000,000 ₱45,000,000 17,000,000 ₱28,000,000 8,000,000 ₱36,000,000

EBIT Less: Taxes EAT Add: Depreciation Operating Cash Flow Problem 4 (Statement of Cash Flows)

₱208,000,000 23,000,000 ₱185,000,000

Notes payable, beginning Payment Notes payable, end Problem 5 (Free Cash Flow) Problem 6 (Free Cash Flow) 13-2

Problem 7 (Working with Financial Statements)