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

13-1

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)