Chapter 16, Problem 1BTN

To determine

1)

Introduction:

Cash Flow Statements:

• Cash flow statements are an integral part of the financial statements of a company. They reflect the direction and movement of the cash inflows and outflows during a reporting period. The cash inflows and outflows are segregated into the following activities:

• Cash flows from Operating activities – The cash inflows refer to sales and income from operating activities and cash outflows include both cash and non-cash outflows from the operating activities i.e. the day to day activities of the business.

• Cash flows from Investing activities – The cash inflows refer to sales and income from investing activities and cash outflows include cash outflows from the investing activities in the form of purchase of fixed assets and investments.

• Cash flows from Financing activities – The cash inflows refer to income from financing activities such as raising share capital and debt and cash outflows include cash outflows from the financing activities in the form of dividends and interest paid.

There are two methods of preparing cash flow statements:

• Direct Method – It measures the actual cash inflows and cash outflows that are affected during a particular reporting period. The actual cash flows do not include non-cash items and items that are recorded owing to the accrual principle.

• Indirect Method –It measures the cash inflows and cash outflows that are affected during a particular reporting period including the non-cash items and items that are recorded owing to the accrual principle.

To Determine:

The method of preparation of the cash flow statements of Apple.

Answer to Problem 1BTN

Solution:

The cash flow statements of Apple are prepared under the Indirect Method.

Explanation of Solution

• The Indirect method of preparation of cash flow statements measures the cash inflows and cash outflows that are affected during a particular reporting period including the non-cash items and items that are recorded owing to the accrual principle.

• Cash inflows and outflows from both balance sheet accounts such as accounts receivable, accounts payable, inventory etc as well as Income statement accounts such as Sales, Depreciation Expense etc. and the changes in the values from the preceding period and the effect of the same on the net income is detailed in the cash flow statement of the current year.

• Cash flows under the indirect method take into account a comprehensive view of the cash flows for the year and hence are the more preferred method of preparation of cash flow statements.

• Non cash items include depreciation, amortization expenses, prepaid expenses etc. and the accrual principle requires items of the financial statements to reflect data of the current reporting period and hence the indirect method is preferred.

Conclusion

Hence the method of preparation of the cash flow statements of Apple is explained.

To determine

2)

Introduction:

Cash Flow Statements:

• Cash flow statements are an integral part of the financial statements of a company. They reflect the direction and movement of the cash inflows and outflows during a reporting period. The cash inflows and outflows are segregated into the following activities:

• Cash flows from Operating activities – The cash inflows refer to sales and income from operating activities and cash outflows include both cash and non-cash outflows from the operating activities i.e. the day to day activities of the business.

• Cash flows from Investing activities – The cash inflows refer to sales and income from investing activities and cash outflows include cash outflows from the investing activities in the form of purchase of fixed assets and investments.

• Cash flows from Financing activities – The cash inflows refer to income from financing activities such as raising share capital and debt and cash outflows include cash outflows from the financing activities in the form of dividends and interest paid.

To Determine:

Whether the cash flows from operating activities exceed the cash outflows paid for dividend.

Answer to Problem 1BTN

Solution:

The cash flows from operating activities for Fiscal years 2015,2014 and 2013 do not exceed the cash outflows paid in the form of dividends.

Explanation of Solution

• The following table highlights the cash flows from financing activities and cash flows from operating activities.

Particulars	2013 ($ Million)	2014 ($ Million)	2015 ($ Million)
Cash flows from Operations	53.67 Billon	59.71 Billion	81.27 Billion
Dividends Paid	10.56 Billion	11.13 Billion	11.56 Billion

• The Cash flows from Operations are the excess of income through sales of goods and services over the expenses of operations and include direct costs in the form of material, labour and overheads and indirect costs including depreciation, selling and distribution expenses etc.

• The cash flows from operations also include effect of changes to current assets and current liabilities in the reporting period. The Cash flows from operations increase from $53.67 Million Billion to $81.27 Million Billion over a period of 3 years from 2013 to 2015.

• Dividends Paid are returns to shareholders of the company in the form of distribution of profits. It is essential to pay dividends to meet investor expectations.

• The Dividends paid increase from $10.56 Million Billion to $11.56 Million Billion over a period of 3 years from 2013 to 2015.

• However the amount of dividends does not exceed the amount of cash flow from operations.

Conclusion

Hence it can be seen that cash flows from operating activities do not exceed the cash outflows paid for dividend.

To determine

3)

Introduction:

Cash Flow Statements:

• Cash flow statements are an integral part of the financial statements of a company. They reflect the direction and movement of the cash inflows and outflows during a reporting period. The cash inflows and outflows are segregated into the following activities:

• Cash flows from Operating activities – The cash inflows refer to sales and income from operating activities and cash outflows include both cash and non-cash outflows from the operating activities i.e. the day to day activities of the business.

• Cash flows from Investing activities – The cash inflows refer to sales and income from investing activities and cash outflows include cash outflows from the investing activities in the form of purchase of fixed assets and investments.

• Cash flows from Financing activities – The cash inflows refer to income from financing activities such as raising share capital and debt and cash outflows include cash outflows from the financing activities in the form of dividends and interest paid.

To Determine:

The largest amount reconciling the difference between the net income and the cash flow from operating activities in the fiscal years 2015, 2014 and 2013.

Answer to Problem 1BTN

Solution:

The largest amount reconciling the difference between the net income and the cash flow from operating activities in the fiscal years 2015, 2014 and 2013 is the Changes in working capital in the year 2015 and Depreciation on assets in the year 2013 and 2014.

Explanation of Solution

The following table highlights the key figures for the years 2013, 2014 and 2015.

Particulars	2013 ($ Million)	2014 ($ Million)	2015 ($ Million)
Net Income	37.04 Billon	39.51 Billion	53.39 Billion
Depreciation	6.76 Billion	7.95 Billion	11.26 Billion
Changes in Working Capital	6.48 Billion	7.05 Billion	11.65 Billion
Cash flows from Operations	53.67 Billon	59.71 Billion	81.27 Billion

• The Net Income before Extraordinary items is the starting point of preparation of cash flow statements. It is taken from the Income summary. Net Income increases year on year from $37.04 Million Billion to $53.39 Million Billion over a period of 3 years from 2013 to 2015.

• Depreciation is the cost of wear and tear of assets owing to their usage, charged to the income statement over the useful life of the assets. Depreciation increases year on year from $6.76 Million Billion to $11.26 Million Billion over a period of 3 years from 2013 to 2015.

• Changes in Working Capital are the sum total of the effect of changes to current assets and Current liabilities over the reporting period. The change in working capital indicates change in cash flows owing to current assets and current liabilities. Changes in Working Capital increase year on year from $6.48 Million Billion to $11.65 Million Billion over a period of 3 years from 2013 to 2015.

• The increase in depreciation exceeds the increase in changes in working capital in the years 2013 and 2014. However in the year 2015 increase in depreciation is less than the increase in changes in working capital.

Conclusion

Hence it can be seen that the largest amount reconciling the difference between the net income and the cash flow from operating activities in the fiscal years 2015, 2014 and 2013 is the Changes in working capital in the year 2015 and Depreciation on assets in the year 2013 and 2014.

To determine

4)

Introduction:

Cash Flow Statements:

• Cash flow statements are an integral part of the financial statements of a company. They reflect the direction and movement of the cash inflows and outflows during a reporting period. The cash inflows and outflows are segregated into the following activities:

• Cash flows from Operating activities – The cash inflows refer to sales and income from operating activities and cash outflows include both cash and non-cash outflows from the operating activities i.e. the day to day activities of the business.

• Cash flows from Investing activities – The cash inflows refer to sales and income from investing activities and cash outflows include cash outflows from the investing activities in the form of purchase of fixed assets and investments.

• Cash flows from Financing activities – The cash inflows refer to income from financing activities such as raising share capital and debt and cash outflows include cash outflows from the financing activities in the form of dividends and interest paid.

To Identify:

The largest cash inflows and cash outflows in investing and financing activities in the years 2014, 2015.

Answer to Problem 1BTN

Solution:

• The largest cash inflows in investing activities in the years 2014 and 2015 are Sale / Maturity of Investments.

• The largest cash inflows in financing activities in the years 2014 and 2015 are Issuance / Reduction of Debt.

• The largest cash outflows in investing activities in the years 2014 and 2015 are Purchase of Investments.

• The largest cash outflows in financing activities in the years 2014 and 2015 are Change in Common Stock.

Explanation of Solution

The following table highlights the various key figures for the years 2014 and 2015.

Particulars	2014 ($ Million)	2015 ($ Million)
Sale/Maturity of Investments	208.11 Billion	121.99 Billion
Issuance/Reduction of Debt, Net	18.27 Billion	29.31 Billion
Purchase of Investments	(217.13 Billion)	(166.4 Billion)
Change in Capital Stock	(44.27 Billion)	(34.71 Billion)

• A clear reading of the financial statements indicates that the change in key figures of the Sale/Maturity of Investments, Issuance/Reduction of Debt, Net, Purchase of Investments and Change in Capital Stock are the largest items on the cash flow statement with respect to the Investing and Financing Activities.

• Investing activities are related to acquisition of assets and disposal of assets during the reporting period. They are concerned with the changes in non-current assets of the business.

• Financing activities are concerned with the acquisition and disposal of funds in the forms of equity and debt during a reporting period. They are concerned with the changes in non-current liabilities of the business.

Conclusion

Hence it can be seen:

• The largest cash inflows and cash outflows in investing and financing activities in the years 2014, 2015 are Sale / Maturity of Investments and Issuance / Reduction of Debt respectively.

• The largest cash inflows and cash outflows in investing and financing activities in the years 2014, 2015 are Purchase of Investments and Change in Common Stock respectively.

To determine

5)

Introduction:

Cash Flow Statements:

• Cash flow statements are an integral part of the financial statements of a company. They reflect the direction and movement of the cash inflows and outflows during a reporting period. The cash inflows and outflows are segregated into the following activities:

• Cash flows from Operating activities – The cash inflows refer to sales and income from operating activities and cash outflows include both cash and non-cash outflows from the operating activities i.e. the day to day activities of the business.

• Cash flows from Investing activities – The cash inflows refer to sales and income from investing activities and cash outflows include cash outflows from the investing activities in the form of purchase of fixed assets and investments.

• Cash flows from Financing activities – The cash inflows refer to income from financing activities such as raising share capital and debt and cash outflows include cash outflows from the financing activities in the form of dividends and interest paid.

To Identify:

The largest cash inflows and cash outflows in investing and financing activities in the years after 2015.

Answer to Problem 1BTN

Solution:

• The largest cash inflows in investing activities in the years after 2015 are Sale / Maturity of Investments.

• The largest cash inflows in financing activities in the years after 2015 are Issuance / Reduction of Debt.

• The largest cash outflows in investing activities in the years after 2015 are Purchase of Investments.

• The largest cash outflows in financing activities in the years after 2015 are Change in Common Stock.

Explanation of Solution

The following table highlights the various key figures for the years after 2015.

Particulars	2016 ($ Million)	2017 ($ Million)
Sale/Maturity of Investments	111.79 Billion	126.34 Billion
Issuance/Reduction of Debt, Net	24.95 Billion	28.66 Billion
Purchase of Investments	(142.43 Billion)	(159.49 Billion)
Change in Capital Stock	(29.23 Billion)	(32.35 Billion)

• A clear reading of the financial statements indicates that the change in key figures of the Sale/Maturity of Investments, Issuance/Reduction of Debt, Net, Purchase of Investments and Change in Capital Stock are the largest items on the cash flow statement with respect to the Investing and Financing Activities.

• Investing activities are related to acquisition of assets and disposal of assets during the reporting period. They are concerned with the changes in non-current assets of the business.

• Financing activities are concerned with the acquisition and disposal of funds in the forms of equity and debt during a reporting period. They are concerned with the changes in non-current liabilities of the business.

Conclusion

Hence it can be seen:

• The largest cash inflows and cash outflows in investing and financing activities in the years after 2015 are Sale / Maturity of Investments and Issuance / Reduction of Debt respectively.

• The largest cash inflows and cash outflows in investing and financing activities in the years after 2015 are Purchase of Investments and Change in Common Stock respectively.