Question

On its income statement for a recent year, Continental Airlines, Inc. reported a net loss of $68 million from operations. On its statement of cash flows, it reported $457 million of cash flows from operating activities.

Explain this apparent contradiction between the loss and the positive cash flows.

 

Answer 1

There were net additions, such as depreciation and amortization of intangible assets of $389 million, to the net loss reported on the income statement to convert the net loss from the accrual basis to the cash basis. For example, depreciation is an expense in determining net income, but it does not result in a cash outflow. Thus, depreciation is added back to the net loss in order to determine cash flow from operations. 

 

The cash from operating activities detail is provided as follows for class discussion:

 

CONTINENTAL AIRLINES, INC.

Cash Flows from Operating Activities

(Selected from Statement of Cash Flows)

(in millions)

 

CASH FLOWS FROM OPERATING ACTIVITIES

      Net income (loss).................................................................................................            $  (68)

      Adjustments to reconcile net income (loss) to net cash flow

           provided by operating activities:

      Depreciation and amortization.............................................................................               389

      Special charges.....................................................................................................                 67

      Gain on disposition of investments.....................................................................             (204)

      Undistributed equity in the income of other companies...............................               (62)

      Other, net.............................................................................................................               (18)

      Changes in certain assets and liabilities:

           Decrease (increase) in accounts receivable......................................................               (56)

           Decrease (increase) in spare parts and supplies...............................................                 (7)

           Decrease (increase) in prepaid expenses..........................................................               (59)

           Increase (decrease) in accounts payable..........................................................                 80

           Increase (decrease) in air traffic liability.........................................................               318

           Increase (decrease) in other liabilities..............................................................                 77

     

 Net cash provided by (used in) operating activities............................................             $457