Question

Question 3

The statement of cash flows for SRC is reproduced here:

SRC, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands)
	FOR PERIOD ENDED
	Year 9 ($)	Year 8 ($)	Year 7 ($)
Cash flows from operating activities:
Net income Adjustments to reconcile net income to net cash flows from operating activities: Pretax non-recurring charge Depreciation and amortization Deferred compensation expense Deferred income taxes Pretax gain on sale of subsidiary Loss on disposal of fixed assets Changes in assets and liabilities excluding effects of divestitures: Receivables Inventory Prepaid advertising Other prepaid expenses Accounts payable Reserve for returns Accrued liabilities Accrued profit sharing Income taxes payable Other Net cash flows from (used for) operating activities.	$ 31,185 12,600 18,731 653 (5,948) - 586 (5,640) 21,468 (2,844) (2,504) 4,179 1,065 6,993 (2,030) (5,899) 1,665 74,260	$ 64,150 - 15,127 323 (1,158) (7,805) 1,127 (7,019) (104,545) (7,447) (1,366) 11,616 944 8,755 1,349 (1,047) 64 (26,932)	$ 50,952 13,558 317 994 325 (675) 22,371 4,758 (145) 14,205 629 4,390 1,454 8,268 394 121,795
Cash flows from (used for) investing activities
Cash paid for capital additions Proceeds from sale of subsidiary Net cash flows used for investing activities	(46,750) - (46,750)	(47,659) 12,350 (35,309)	(18,481) - (18,481)
Cash flows from (used for) financing activities
Proceeds from short-term debt Purchases of treasury stock Issuance of treasury stock Net cash flows used for financing activities Net increase (decrease) in cash and cash equivalents Beginning cash and cash equivalents Ending cash and cash equivalents	6,505 (35,557) 1,845 (27,207) $ 303 6,338 $ 6,641	21,242 (45,899) 409 (24,248) $ (86,489) 92,827 $ 6,338	1,876 (30,143) 604 (27,663) $ 75,651 17,176 $ 92,827

Required:

1. SRC recently implemented a strategy of filing nearly all orders when the order is placed. In what year do you believe the company implemented this strategy and how is the strategy reflected in the information contained in the statement of cash flows?

2. Explain how the following items reconcile net income to net cash flows from operating activities:
   • Depreciation
   • Receivables
   • Inventory
   • Reserve for returns

3. Calculate free cash flows for each year shown.
   4. marks)

d. How does SRC use its free cash flow? Do you think its use of free cash flows reflects good financial strategy?

5. marks)

Answer 1

A) In question a) company strated to implement filing orders when order is placed. In this strategy produced goods as an when order is placed so in this strategy inventory value is Nil.In this strategy inventory required to maintain zero.

b) Following items reconcils as under.

1.Deprecition:- As deprecion is non cash flow items and it was debited to Profit and loss account. It need to be Add back to revenue income to calculate free cash flow.

2.Receivables :- It means amount due from receivables.It means higher the receivables higher the cash flow blocked in receivabls and vice versa.

3.Inventory:- Higher the inventory means higher the fund block in inventory and vice versa.It is always benificial to keep minimum inventory for better cash flow.

4.Reserve for Returns:- It is residual amount after all payment inculding taxes in the hands of Company.

c) Computation of free cash flow :-

	FOR THE PERIOD ENDED $
Cash flows from operating activities:	9	8	7
Net income	31,185	64,150	50,952
Adjustments to reconcile net income to net cash flows from operating activities:
Pretax non-recurring charge	12,600	-	13,558
Depreciation and amortization	18,731	15,127	317
Deferred compensation expense	653	323	994
Deferred income taxes	-5,948	-1,158	325
Pretax gain on sale of subsidiary	-	-7,805	-675
Loss on disposal of fixed assets	586	1,127	22,371
Changes in assets and liabilities excluding effects of divestitures: Receivables	-5,640	-7,019	4,758
Inventory	0	0	0
Prepaid advertising	-2,844	-7,447	14,205
Other prepaid expenses	-2,504	-1,366	629
Accounts payable	4,179	11,616	4,390
Reserve for returns	1,065	944	1,454
Accrued liabilities	6,993	8,755	8,268
Accrued profit sharing	-2,030	1,349	394
Income taxes payable	-5,899	-1,047
Other	1,665	64
Net cash flows from (used for) operating activities.	52,792	77,613	1,21,940
Cash flows from (used for) investing activities
Cash paid for capital additions	-46,750	-47,659	-18,481
Proceeds from sale of subsidiary	-	12,350	-
Net cash flows used for investing activities	-46,750	-35,309	-18,481
Cash flows from (used for) financing activities
Proceeds from short-term debt	6,505	21,242	1,876
Purchases of treasury stock	-35,557	-45,899	-30,143
Issuance of treasury stock	1,845	409	604
Net cash flows used for financing activities	-27,207	-24,248	-27,663
Net increase (decrease) in cash and cash equivalents	-21,165	18,056	75,796
Beginning cash and cash equivalents	1,11,028	92,972	17,176
Ending cash and cash equivalents	89,863	1,11,028	92,972

D) After implementation of strategy cash flow increases in year 9 from $6641 to $ 89,863. Yes free cash flow reflects good sign for company as it sign for sound financial position.