Question

The following is the 2016 statement of cash flows for PulteGroup, Inc.

PULTE HOMES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the 12 months ended December 31

($ thousands)	2016		2015		2014
Cash flows from operating activities:
Net income	$ 602,703		$ 494,090		$ 474,338
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense	334,787		311,699		223,769
Write-down of land and pre-acquisition costs	19,357		11,467		11,168
Depreciation and amortization	54,007		46,222		39,864
Stock-based compensation expense	22,228		24,752		29,292
Loss on debt retirements	657		--		8,584
Other, net	1,614		(4,865	)	(2,566	)
Increase (decrease) in cash due to:
Inventories	(897,092	)	(917,298	)	(337,939	)
Residential mortgage loans available-for-sale	(99,527	)	(104,609	)	(53,734	)
Other assets	(45,721	)	(175,150	)	(46,249	)
Accounts payable and other liabilities	75,257		(23,898	)	(38,646	)
Net cash provided by (used in) operating activities	68,270		(337,590	)	307,881
Cash flows from investing activities:
Capital expenditures	(39,295	)	(45,440	)	(48,790	)
Investment in unconsolidated subsidiaries	(14,539	)	(454	)	(9	)
Cash used for business acquisition	(430,458	)	--		(82,419	)
Other investing activities, net	13,100		11,330		8,605
Net cash used in investing activities	(471,192	)	(34,564	)	(122,613	)
Cash flows from financing activities:
Proceeds from debt issuance	1,995,937		498,087		--
Repayments of debt	(986,919	)	(239,193	)	(250,631	)
Borrowings under revolving credit facility	619,000		125,000		--
Repayments under revolving credit facility	(619,000	)	(125,000	)	--
Financial services borrowings	63,744		127,636		34,577
Stock option exercises	5,845		10,535		15,627
Share repurchases	(603,206	)	(442,738	)	(253,019	)
Dividends paid	(124,666	)	(115,958	)	(75,646	)
Net cash provided by (used in) financing activities	350,735		(161,631	)	(529,092	)
Net increase (decrease)	(52,187	)	(533,785	)	(343,824	)
Cash and equivalents at beginning of period	775,435		1,309,220		1,653,044
Cash and equivalents at end of period	$ 723,248		$ 775,435		$1,309,220

Required:

a.	In determining operating cash flow in 2016, the company includes share-based compensation expense of $22,228 thousand. Why does the company add this amount?
b.	The operating section in 2016 includes an increase in cash of $75,257 for “Accounts payable, accrued and other liabilities.” Explain this reconciling item.
c.	Does the composition of PulteGroup’s cash flow statement present a “healthy” picture? Explain.

Answer 1

Answer

a. Share-based compensation" is an expense paid with common stock rather than cash. Since it does not use cash, it is added back to net income to determine cash flows from operations.

b. Assuming that the income statement is prepared using the accrual method of accounting, the net income must be adjusted for the expenses that were not paid during the current accounting period (as well as the revenues which did not result in cash receipts in the current period).

If a company's Accounts payable, accrued and other liabilities has increased, it means that the company did not pay for all of the expenses that were included in the current period's income statement. As a result, the company's cash balance should be increasing by more than the reported amount of net income.

c. Year 2016

Net cash provided by (used in) operating activities : +ve

Net cash used in investing activities: -ve Net cash provided by (used in) financing activities : +ve From the above cash flow pattern it appears that Company is sucessful and growing with growth partially finance by creditors & other liabilities and borrowings

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