cs.wis.010 Comparing and contrasting common line items on cash flow statements

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Cash Flow Statements» What Do I See?» Exercises www.navigatingaccounting.com SOLUTIONS cs.wis.

1 Cash Flow Statements» What Do I See?» Exercises SOLUTIONS cs.wis.010 Comparing and contrasting common line items on cash flow statements This exercise compares and contrasts the cash flow statements for Air Canada, Air France-KLM, Christian Dior, CVS- Caremark, H&M, McDonald s, and Unilever. See the companies cash flow statements on pages 2 9. Check your answers in the provided solution. (a) Cash and cash equivalents at the end of the year is the bottom line on Air Canada s cash flow statement. What synonyms on the other companies statements likely represent a similar concept? Air France-KLM refers to cash and cash equivalents and bank overdrafts. H&M refers to liquid funds at the end of the financial year. Knowing the concepts are key to interpreting different companies statements. (b) Many companies list the major categories of cash flows in the following order: operating, investing, and financing. Which, if any, of the companies present their cash flow statement with different major categories or the categories in a different order? Different major categories: Christian Dior has the equivalent information with four labels as its major categories: I. Operating activities and operating investments; II. Financial investments; III. Transactions relating to equity; and IV. Financing activities. CVS-Caremark has operating activities reported twice: at the top and bottom of its cash flow statement. H&M reports two major categories for its operating cash flows: cash flow from current operations before changes in working capital and cash flow from current operations. Different order: Air Canada reports operating, financing, and then investing. (c) CVS-Caremark reports net cash provided by operating activities twice on its cash flow statement: at the top and bottom. Compare and contrast the two operating sections. What is similar? What is different? What s the purpose of reporting net cash provided by operating activities twice? CVS-Caremark reports a direct-method for operating cash flows at the top of its statement and an indirect-method at the bottom. Items that are the same: The reporting period, number of periods presented, and net cash provided by operating activities, e.g., $5,856, the bottom line of the operating section. All of the line items and related numbers above net cash provided by operating activities are different. The purpose of the direct-method at the top of the statement is to disclose the cash inflows and outflows associated with running the business. The purpose of the indirect-method at the bottom of the statement is to disclose the reconciliation of net income to net cash from operations. Unlike the direct-method line items, the reconciliation adjustments are not cash flows. Rather they are items that explain the difference between net income and net operating cash flows during the reporting period. (d) Under the indirect-method of reporting operating activities, most of the related line items that reconcile net income to net cash from operations are not cash flows. Rather, they are adjustments that explain the difference between income and cash. However, some companies list actual cash flows in their indirect cash flow statements within the operating section. Which companies, if any, list actual cash flows within their indirect-method of reporting operating activities? How do you know that these items are cash flows rather than non-cash reconciliation adjustments? Within the indirect-method of reporting operating cash flows descriptions of items paid indicate actual cash flows rather than non-cash reconciliation adjustments: Christian Dior reports cost of net financial debt: interest paid and income tax paid. H&M reports taxes paid. Tesco PLC reports interest paid and corporation tax paid. Unilever reports income taxes paid. You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC.

2 2 NAVIGATING ACCOUNTING (e) Which company reports the fewest line items within its operating section? Does it use a direct or indirect-method within its operating section? How can you tell? Tesco PLC reports only three line items within its operating section (excluding the subtotal of net cash generated from operating activities). Two lines are labeled paid that are clearly cash outflows. The third line, cash generated from operations, is the aggregate of actual net cash flows. Thus, Tesco presents the direct-method for reporting net cash from operations. As an aside, Tesco discloses its indirect reconciliation in a footnote not included with the exercise. (f) Net income is the first item on McDonald s cash flow statement. Which of the other companies recognize this concept in the operating section of their cash flow statements (perhaps using a synonym)? All the indirect statements recognize the same concept for the operating section. Here are the synonyms for net income: Air Canada reports net loss. Air France-KLM reports net income for the period equity holders of Air France-KLM and non-controlling interests. Christian Dior reports operating profit. H&M reports profit after financial items. Unilever reports net profit. (g) The investing section of McDonald s cash flow statement discloses it spent $2,729.8 million on capital expenditures during fiscal This is cash spent on property, plant, and equipment. What synonyms are used by other companies for their capital expenditures? Air Canada reports additions to property, equipment and intangible assets. Air France-KLM reports purchase of property, plant and equipment and intangible assets. Christian Dior reports purchase of tangible and intangible fixed assets. CVS-Caremark reports purchases of property and equipment. H&M reports investment in buildings and land and investment in equipment. Tesco PLC reports purchase of property, plant and equipment and investment property. Unilever reports purchase of property, plant and equipment. (h) Under financing activities, Christian Dior reports proceeds from borrowings of 3,034 during fiscal This is cash received from issuing debt. Assuming the borrowings are long-term, what synonyms are used by other companies for their proceeds from borrowings? Air France-KLM reports issuance of long-term debt. CVS-Caremark reports proceeds from issuance of long-term debt. McDonald s reports long-term financing issuances. Tesco PLC reports increase in borrowings. Unilever reports additional financial liabilities. (i) Under IFRS, companies may elect to classify interest payments as operating or financing (where U.S. GAAP requires interest to be classified as operating). Which companies, if at all, disclose interest payments as a financing activity? Unilever reports interest and preference dividends paid under its financing activities. (j) Reconciliation adjustments within the operating section of indirect statement of cash flows are typically one of four types: adjustments associated with (i) assets, (ii) liabilities, (iii) gains and losses, or (iv) other. Analyze CVS-Caremark s reconciliation adjustments at the bottom of their statement and classify the adjustments into one of the four categories. CVS-Caremark s reconciliation adjustment classifications: i. Assets: depreciation and amortization, accounts receivable, net, inventories, other current assets, other assets, ii. Liabilities: accounts payable, accrued expenses, other long-term liabilities iii. Gains and losses: gain on sale of subsidiary iv. Other: stock-based compensation, deferred income taxes and other noncash items NavAcc LLC, G. Peter & Carolyn R. Wilson

3 EXERCISES CS.WIS Figure 1 Air Canada Statement of Cash Flow This figure is an excerpt from Air Canada s 2011 annual report, page 80. Complies with IFRS. CONSOLIDATED STATEMENT OF CASH FLOW The accompanying notes are an integral part of the consolidated financial statements. Source:

4 4 NAVIGATING ACCOUNTING Figure 2 Air France-KLM Statements of Cash Flows This figure is an excerpt from Air France-KLM s 2011 annual report, page 54. Complies with IFRS. Source:

5 EXERCISES CS.WIS Figure 3 Christian Dior Cash Flow Statement This figure is an excerpt from Christian Diror s 2011 annual report, page 84. Complies with IFRS. 5. Consolidated cash flow statement (EUR millions) Notes I - OPERATING ACTIVITIES AND OPERATING INVESTMENTS Operating profit 5,203 4,172 3,164 Net increase in depreciation, amortization and provisions 1, Other computed expenses (35) (117) (41) Dividends received Other adjustments (29) (1) (43) Cash from operations before changes in working capital 6,270 4,911 3,964 Cost of net financial debt: interest paid (197) (195) (250) Income taxes paid (1,557) (905) (906) Net cash from operating activities before changes in working capital 4,516 3,811 2,808 Change in inventories and work in progress (783) (110) 115 Change in trade accounts receivable (71) (14) 216 Change in trade accounts payable (373) Change in other receivables and payables (33) Total change in working capital (548) Net cash from operating activities 3,968 4,091 2,957 Purchase of tangible and intangible fixed assets (1,835) (1,103) (783) Proceeds from sale of tangible and intangible fixed assets Guarantee deposits paid and other operating investments (16) (8) (6) Operating investments (1,820) (1,078) (763) Net cash from operating activities and operating investments (free cash flow) 2,148 3,013 2,194 II - FINANCIAL INVESTMENTS Purchase of non-current available for sale financial assets (518) (1,724) (93) Proceeds from sale of non-current available for sale financial assets Impact of purchase and sale of consolidated investments (a) 2.4 (785) (61) (277) Net cash from (used in) financial investments (1,286) (1,715) (321) III - TRANSACTIONS RELATING TO EQUITY Capital increases of subsidiaries subscribed by minority interests (a) Acquisition and disposals of treasury shares and related derivatives by the Group Interim and final dividends paid by Christian Dior SA 14.3 (396) (375) (287) Interim and final dividends paid to minority interests in consolidated subsidiaries (805) (697) (604) Purchase and proceeds from sale of minority interests 2.4 (1,413) (185) - Net cash from (used in) transactions relating to equity (2,504) (943) (828) IV - FINANCING ACTIVITIES Proceeds from borrowings 3, ,826 Repayment of borrowings (1,405) (1,386) (2,496) Purchase and proceeds from sale of current available for sale financial assets 6 (32) 321 Net cash from (used in) financing activities 1,635 (764) 651 V - EFFECT OF EXCHANGE RATE CHANGES (114) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (I+II+III+IV+V) 48 (239) 1,582 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13 1,996 2, CASH AND CASH EQUIVALENTS AT END OF PERIOD 13 2,044 1,996 2,235 Transactions included in the table above, generating no change in cash: Source:

6 6 NAVIGATING ACCOUNTING Figure 4 CVS Caremark Statements of Cash Flows This figure is an excerpt from CVS Caremark s K annual report, page 26. Complies with U.S. GAAP. Consolidated Statements of Cash Flows Year Ended December 31, In millions Cash flows from operating activities: Cash receipts from customers $ 97,688 $ 94,503 $ 93,568 Cash paid for inventory and prescriptions dispensed by retail network pharmacies (75,148) (73,143) (73,536) Cash paid to other suppliers and employees (13,635) (13,778) (13,121) Interest received Interest paid (647) (583) (542) Income taxes paid (2,406) (2,224) (2,339) Net cash provided by operating activities 5,856 4,779 4,035 Cash flows from investing activities: Purchases of property and equipment (1,872) (2,005) (2,548) Proceeds from sale-leaseback transactions ,562 Proceeds from sale of property and equipment Acquisitions (net of cash acquired) and other investments (1,441) (177) (101) Purchase of available-for-sale investments (3) (5) Sale or maturity of available-for-sale investments 60 1 Proceeds from sale of subsidiary 250 Net cash used in investing activities (2,410) (1,640) (1,069) Cash flows from financing activities: Increase (decrease) in short-term debt 450 (15) (2,729) Proceeds from issuance of long-term debt 1, ,800 Repayments of long-term debt (2,122) (2,103) (653) Dividends paid (674) (479) (439) Derivative settlements (19) (5) (3) Proceeds from exercise of stock options Excess tax benefits from stock-based compensation Repurchase of common stock (3,001) (1,500) (2,477) Other (9) Net cash used in financing activities (3,460) (2,798) (3,232) Net increase (decrease) in cash and cash equivalents (14) 341 (266) Cash and cash equivalents at the beginning of the year 1,427 1,086 1,352 Cash and cash equivalents at the end of the year $ 1,413 $ 1,427 $ 1,086 Reconciliation of net income to net cash provided by operating activities: Net income $ 3,457 $ 3,424 $ 3,696 Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,568 1,469 1,389 Stock-based compensation Gain on sale of subsidiary (53) Deferred income taxes and other noncash items Change in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net (748) 532 (86) Inventories 607 (352) (1,199) Other current assets (420) (4) 48 Other assets (49) (210) (2) Accounts payable 1,128 (40) 4 Accrued expenses 85 (176) (66) Other long-term liabilities 2 (44) 38 Net cash provided by operating activities $ 5,856 $ 4,779 $ 4,035 Source:

7 EXERCISES CS.WIS Figure 5 H&M Cash Flow Statement This figure is an excerpt from H&M s 2011 annual report, page 13. Complies with IFRS. GROUP CASH FLOW STATEMENT SEK M 1 DECEMBER 30 NOVEMBER Current operations Profit after financial items* 20,942 25,008 Provisions for pensions Depreciation 3,262 3,061 Tax paid -5,666-5,451 Cash flow from current operations before changes in working capital 18,658 22,621 Cash flow from changes in working capital Current receivables Stock-in-trade -2,331-1,557 Current liabilities 1,337 1,552 CASH FLOW FROM CURRENT OPERATIONS 17,420 21,838 Investment activities Investment in leasehold rights Investment in buildings and land Investment in equipment -4,946-4,603 Adjustment of consideration/acquisition of subsidiaries -8 Change in short-term investments, 4 12 months 1,209-5,166 Other investments CASH FLOW FROM INVESTMENT ACTIVITIES -4,056-10,129 Financing activities Dividend -15,723-13,239 CASH FLOW FROM FINANCING ACTIVITIES -15,723-13,239 CASH FLOW FOR THE YEAR -2,359-1,530 Liquid funds at beginning of the financial year 16,691 19,024 Cash flow for the year -2,359-1,530 Exchange rate effect Liquid funds at end of the financial year** 14,319 16,691 * Interest paid for the Group amounts to SEK 5 m (7). Received interest for the Group amounts to SEK 568 m (356). ** Liquid funds and short-term investments at the end of the financial year amounted to SEK 21,277 m (24,858). Source:

8 8 NAVIGATING ACCOUNTING Figure 6 McDonald s Corporation Statements of Cash Flows This figure is an excerpt from McDonald s K annual report, page 29. Complies with U.S. GAAP. Consolidated Statement of Cash Flows In millions Years ended December 31, Operating activities Net income $ 5,503.1 $ 4,946.3 $ 4,551.0 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 1, , ,216.2 Deferred income taxes (75.7) Impairment and other charges (credits), net (3.9) 29.1 (61.1) Gain on sale of investment (94.9) Share-based compensation Other (78.7) (347.1) Changes in working capital items: Accounts receivable (160.8) (50.1) (42.0) Inventories, prepaid expenses and other current assets (52.2) (50.8) 1.0 Accounts payable 35.8 (39.8) (2.2) Income taxes Other accrued liabilities 18.7 (43.2) 2.1 Cash provided by operations 7, , ,751.0 Investing activities Capital expenditures (2,729.8) (2,135.5) (1,952.1) Purchases of restaurant businesses (186.4) (183.4) (145.7) Sales of restaurant businesses and property Proceeds on sale of investment Other (166.1) (115.0) (108.4) Cash used for investing activities (2,570.9) (2,056.0) (1,655.3) Financing activities Net short-term borrowings (285.4) Long-term financing issuances 1, , ,169.3 Long-term financing repayments (624.0) (1,147.5) (664.6) Treasury stock purchases (3,363.1) (2,698.5) (2,797.4) Common stock dividends (2,609.7) (2,408.1) (2,235.5) Proceeds from stock option exercises Excess tax benefit on share-based compensation Other (10.6) (1.3) (13.1) Cash used for financing activities (4,533.0) (3,728.7) (4,421.0) Effect of exchange rates on cash and equivalents (97.5) Cash and equivalents increase (decrease) (51.3) (267.4) Cash and equivalents at beginning of year 2, , ,063.4 Cash and equivalents at end of year $ 2,335.7 $ 2,387.0 $ 1,796.0 Supplemental cash flow disclosures Interest paid $ $ $ Income taxes paid 2, , ,683.5 See Notes to consolidated financial statements. Source:

9 EXERCISES CS.WIS Figure 7 Tesco PLC Cash Flow Statement This figure is an excerpt from Tesco s 2012 annual report, page 94. Complies with IFRS. Group cash flow statement 52 weeks 52 weeks Year ended 25 February * notes m m Cash flows from operating activities Cash generated from operations 29 5,688 5,613 Interest paid (531) (614) Corporation tax paid (749) (760) Net cash generated from operating activities 4,408 4,239 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired (65) (89) Proceeds from sale of property, plant and equipment, investment property and non-current assets classified as held for sale 1,141 1,906 Purchase of property, plant and equipment and investment property (3,374) (3,178) Proceeds from sale of intangible assets 3 Purchase of intangible assets (334) (373) Net decrease/(increase) in loans to joint ventures 122 (194) Investments in joint ventures and associates (49) (174) Investments in short-term and other investments (1,972) (683) Proceeds from sale of short-term and other investments 1, Dividends received from joint ventures and associates Interest received Net cash used in investing activities (3,183) (1,873) Cash flows from financing activities Proceeds from issue of ordinary share capital Increase in borrowings 2,905 2,217 Repayment of borrowings (2,720) (4,153) Repayment of obligations under finance leases (45) (42) Purchase of non-controlling interests (89) Dividends paid to equity owners (1,180) (1,081) Dividends paid to non-controlling interests (3) (2) Own shares purchased (303) (31) Net cash used in financing activities (1,366) (2,994) Net decrease in cash and cash equivalents (141) (628) Cash and cash equivalents at beginning of the year 2,428 3,102 Effect of foreign exchange rate changes 24 (46) Cash and cash equivalents including cash held in disposal group at the end of the year 2,311 2,428 Cash held in disposal group (6) Cash and cash equivalents at the end of the year 18 2,305 2,428 Source:

10 10 NAVIGATING ACCOUNTING Figure 8 Unilever Cash Flow Statement This figure is an excerpt from Unilever s 2012 annual report, page 67. Complies with IFRS. Consolidated cash flow statement for the year ended 31 December million 2011 million 2010 million 2009 Net profit 4,623 4,598 3,659 Taxation 1,622 1,534 1,257 Share of net profit of joint ventures/associates and other income from non-current investments (189) (187) (489) Net finance costs: Finance income (92) (77) (75) Finance cost Pensions and similar obligations (71) (20) 164 Operating profit 6,433 6,339 5,020 Depreciation, amortisation and impairment 1, ,032 Changes in working capital: (177) 169 1,701 Inventories (219) (573) 473 Trade and other current receivables (399) (343) 640 Trade payables and other liabilities 441 1, Pensions and similar obligations less payments (553) (472) (1,028) Provisions less payments 9 72 (258) Elimination of (profits)/losses on disposals (215) (476) 13 Non-cash charge for share-based compensation Other adjustments Cash flow from operating activities 6,639 6,818 6,733 Income tax paid (1,187) (1,328) (959) Net cash flow from operating activities 5,452 5,490 5,774 Interest received Purchase of intangible assets (264) (177) (121) Purchase of property, plant and equipment (1,835) (1,638) (1,248) Disposal of property, plant and equipment Acquisition of group companies, joint ventures and associates (3,098) (1,252) (409) Disposal of group companies, joint ventures and associates 1, Acquisition of other non-current investments (88) (85) (95) Disposal of other non-current investments Dividends from joint ventures, associates and other non-current investments (Purchase)/sale of financial assets (1,072) 578 (269) Net cash flow (used in)/from investing activities (4,467) (1,164) (1,263) Dividends paid on ordinary share capital (2,485) (2,323) (2,106) Interest and preference dividends paid (496) (494) (517) Net change in short-term borrowings 1,261 (46) (227) Additional financial liabilities 3, ,140 Repayment of financial liabilities (907) (1,391) (4,456) Capital element of finance lease rental payments (16) (22) (24) Other movements on treasury stock 30 (124) 103 Other financing activities (395) (295) (214) Net cash flow (used in)/from financing activities 411 (4,609) (4,301) Net increase/(decrease) in cash and cash equivalents 1,396 (283) 210 Cash and cash equivalents at the beginning of the year 1,966 2,397 2,360 Effect of foreign exchange rate changes (384) (148) (173) Cash and cash equivalents at the end of the year 15 2,978 1,966 2,397 The cash flows of pension funds (other than contributions and other direct payments made by the Group in respect of pensions and Source:

Dividends, Closing Entries, and Record Keeping and Reporting Map

Dividends, Closing Entries, and Record Keeping and Reporting Map Consolidated Statements of Cash Flows Three years ended December 25,1999 (in millions -except per share amounts) 1999 1998 1997 Cash and cash equivalents, beginning of year $2,038 $4,102 $4,165 Cash flows