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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Interpreting the Statement of Cash Flows. Sunbeam Corporation manufactures and sells a variety of small household appliances, including toasters, food processors, and waffle grills. Exhibit 3.21 presents a statement of cash flows for Sunbeam for Year 5, Year 6, and Year 7. After experiencing decreased sales in Year 5, Sunbeam hired Albert Dunlap in Year 6 to turn the company around. Albert Dunlap, known in the industry as “Chainsaw Al,” had previously directed restructuring efforts at Scott Paper Company. The restructuring effort at Sunbeam generally involved firing employees and cutting costs aggressively. Most of these restructuring efforts took place during Year 6. The market expected significantly improved results in Year 7. Reported sales increased 18.7% between Year 6 and Year 7, and net income improved. However, subsequent revelations showed that almost half of the sales increase resulted from fraudulent early recognition of revenues in the fourth quarter of Year 7 that the firm should have recognized in the first quarter of Year8. Growth in revenues for Years 5, 6, and 7 was −2.6%, −3.2%, and 18.7%, respectively.

Using the information provided and the statement of cash flows for Year 5 in Exhibit3.21, identify any signals that Sunbeam was experiencing operating difficulties and was in need of restructuring.

Sunbeam Corporation Statement of Cash Flows (amounts in millions) (Problem
3.23)
Year 7
Year 6
Year 5
OPERATIONS
$ 109.4
$ 50.5
44.2
Net income (loss)
$(228.3)
Depreciation and amortization
38.6
47.4
Restructuring and asset impairment charges
283.7
Deferred income taxes
57.8
(77.8)
25.1
Other additions
13.7
46.2
10.8
Other subtractions
(84.6)
(27.1)
(21.7)
(Increase) Decrease in accounts receivable
(84.6)
(13.8)
(4.5)
(Increase) Decrease in inventories
(100.8)
(9.0)
(11.6)
(4.9)
(Increase) Decrease in prepayments
Increase (Decrease) in accounts payable
Increase (Decrease) in other current liabilities
2.7
(8.8)
(1.6)
14.7
9.2
52.8
$ (8.3)
(21.9)
$ 14.2
(18.4)
$ 81.5
Cash Flow from Operations
INVESTING
$ (58.3)
$ (75.3)
Fixed assets acquired
Sale of businesses
Acquisitions of businesses
Cash Flow from Investing
$(140.1)
91.0
65.3
$ 32.7
(,9)
$ (76.2)
(33.0)
S(107.4)
FINANCING
$ 5.0
$ 30.0
Increase (Decrease) in short-term borrowing
Increase in long-term debt
Issue of common stock
$ 40.0
11.5
-
26.6
9.2
9.8
Decrease in long-term debt
Acquisition of common stock
Dividends
(12.2)
(1.8)
(5.4)
(13.0)
(3.4)
(3.3)
(3.3)
Other financing transactions
Cash Flow from Financing
Change in Cash
Cash-Beginning of year
0.5
$ 16.5
$ 40.9
11.5
$ 52.4
(4)
$ 45.2
$ (16.8)
(,2)
$ 27.9
$ 2.0
26.3
$ 28.3
28.3
Cash-End of Year
$ 11.5
Source: Sunbeam Corporation, Form 10-K for the Fiscal Year Ended 1997.

Expert Solution

Step 1

Sunbeam operations is facing a lot of difficulties which is clearly evident from its declining sales patter, commonly a low sales is accompanied with lower accounts receivable and less inventory, but the contrary in Year 5 suggests that Sunbeam is unable to efficiently manage its working capital. Sunbeam also incurred a great amount in capital expenditure which is supposed to be a production improvement initiative to promote sales. Low sales forces Sunbeam to arrange short-term finance as well which is not a positive sign for growth, Sunbeam also wants to dilute its common equity by repurchasing the same number of shares which he offered to employees.

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