Mt 482 Cash Flow Analysis

In: Business and Management

Submitted By werka1988
Words 395
Pages 2
1. Analysis of the statement of cash flows suggests that this strategy was implemented during year 8. Specifically, during that year the cash flows of Land’s End to build up its inventory to implement its new policy are very high---$104.545 million cash outflow to acquire additional inventory. 2. Depreciation expense represents the allocation of the cost of fixed assets over the useful life of the asset. Amortization expense represents the allocation of the cost of intangible assets over the useful life of the asset. In each of these cases, the investing cash outflow occurs when the asset is acquired and not when its cost is subsequently allocated to expense. a. Increases in receivables cause operation cash flows to be less than net income because revenues (reflecting receivables) are included in the net income, but the related cash may not yet be received. On the other hand, decreases in receivables cause operating cash flows to be greater than net income because cash is received for revenues recognized in prior periods. b. Decreases in inventory causes net income to be higher than operating cash flows because sales revenue is recognized when earned but the inventory sold can be paid for in earlier periods. Increases in inventory cause operating cash flows to be less than net income because cash was used to increase inventory levels. When these inventories are subsequently sold revenues will be earned and net income will be increased. However, this inventory will be expensed on the net income statement in the period that it is sold c. Each year, Land’s End establishes a reserve for sales return. As a result, a reconciling item is created between net income and operating cash flows because the cash outflow to cover the reserve will occur in the next period when a portion of the sold items is actually returned. 3. Free cash flow =…...

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