Page 643 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Company's cash flows and results of operations in particular quarterly or annual periods could be affected by the
one-time impacts of the resolution of such contingencies, it is the opinion of management that the ultimate
disposition of these matters, to the extent not previously provided for, will not have a material impact on the

Company's financial condition or ongoing cash flows and results of operations.
Refer to Exhibit 131. First we will discuss the items in the operating activities section of the statement of cash
flows, then we will discuss investing activities and financing activities.
Operating activities The company used the indirect method of calculating net cash provided by operations.
Various adjustments were made to convert accrual based net income to cash basis net income.
The "restructured operations, net" item resulted from the fact that many companies restructured their
operations by closing plants and significantly reducing their work forces. Some companies recognized a net loss

from restructuring and others recognized a net gain. Apparently, the company recognized a net gain in 2010
because it deducted the item from net income on the statement of cash flows. The actual cash flows from
restructuring will occur in a later period.
"Depreciation and amortization" includes depreciation on plant assets and amortization of intangible assets.
Depreciation and amortization are noncash charges against revenues and must be added back to net income.
The "deferred income taxes and other, net" item deduction from net income results primarily from the fact that
income tax expense on the income statement was lower than the actual income taxes paid in 2010. This
phenomenon occurs because of using a different method for tax and accounting purposes for such items as
depreciation.

Receivables and inventories increased (causing cash to decrease), while other current assets remained about the
same. Payables and accruals increased (causing cash to increase). These changes are net of any amounts related to
acquisitions, dispositions, or amounts that are included elsewhere, such as in "restructured operations, net". The
changes described may differ from the amounts derived from only analyzing the balance sheets for the last two
years because of certain technical "adjustments" that are beyond the scope of this text.
Investing activities "Capital expenditures" include the purchase of plant assets, such as new machinery and
equipment, to modernize production facilities. Companies normally select those capital expenditures with the

highest rate of return. For instance, if funds are limited (and they normally are) and two capital investments (a
machine and a mainframe computer) are being considered, one yielding a 20 per cent return and the other yielding
a 25 per cent return, the company will normally select the one with the 25 per cent return.
"Payment for acquisitions, net of cash acquired" shows the amount spent in acquiring other companies and
segments of other companies, net of the amount of cash held by those companies and obtained as a part of the
acquisition.
The company sold "marketable securities and other investments". These securities normally consist of stocks,
bonds, and other instruments of other companies. For fiscal years beginning after 1993 December 15, marketable
securities must be identified as trading securities, available-for-sale securities, or held-to-maturity securities.

Trading securities and available-for-sale securities were discussed in some detail in Chapter 14. Held-to-maturity
securities were mentioned briefly in Chapter 15. These held-to-maturity securities are debt securities (such as bonds
of other companies) that the company has purchased and has both the intent and ability to hold to maturity. As
mentioned earlier, the proceeds from sales and purchases of trading securities must be shown as cash flows from

Accounting Principles: A Business Perspective 644 A Global Text