Chapter3-SolutionsOverview:ProblemLengthProblem#’s{S}1,3{M}2,7,8,12,13{L}4-6,9-11,14,151.{S}a.PalombaPizzaStoresStatementofCashFlowsYearEndedDecember31,2000CashFlowsfromOperatingActivities:CashCollectionsfromCustomersCashPaymentstoSuppliersCashPaymentsforSalariesCashPaymentsforInterestNetCashfromOperatingActivitiesCashFlowsfromInvestingActivities:SalesofEquipmentPurchaseofEquipmentPurchaseofLandNetCashforInvestingActivitiesCashFlowsfromFinancingActivities:RetirementofCommonStockPaymentofDividendsNetCashforFinancingActivitiesNetIncreaseinCashCashatBeginningofYearCashatEndofYear$250,000(85,000)(45,000)(10,000)38,000(30,000)(14,000)(25,000)(35,000)$110,000(6,000)(60,000)$44,00050,000$94,000b.CashFlowfromOperations(CFO)measuresthecashgeneratingabilityofoperations,inadditiontoprofitability.Ifusedasameasureofperformance,CFOislesssubjecttodistortionthannetincome.AnalystsusetheCFOasacheckonthequalityofreportedearnings,althoughitisnotasubstitutefornetincome.CompanieswithhighnetincomeandlowCFOmaybeusingoverlyaggressiveincomerecognitiontechniques.Theabilityofafirmtogeneratecashfromoperationsonaconsistentbasisisoneindicationofthefinancialhealthofthefirm.Analystssearchfor3-1trendsinCFOtoindicatefuturecashconditionsandpotentialliquidityorsolvencyproblems.CashFlowfromInvestingActivities(CFI)reportshowthefirmisinvestingitsexcesscash.TheanalystmustconsidertheabilityofthefirmtocontinuetogrowandCFIisagoodindicationoftheattitudeofmanagementinthisarea.Thiscomponentoftotalcashflowincludesthecapitalexpendituresmadebymanagementtomaintainandexpandproductivecapacity.DecreasingCFImaybeaforecastofslowerfuturegrowth.CashFlowfromFinancing(CFF)indicatesthesourcesoffinancingforthefirm.Forfirmsthatrequireexternalsourcesoffinancing(eitherborrowingorequityfinancing)itcommunicatesmanagement'spreferencesregardingfinancialleverage.Debtfinancingindicatesfuturecashrequirementsforprincipalandinterestpayments.Equityfinancingwillcausefutureearningspersharedilution.Forfirmswhoseoperatingcashflowexceedsinvestmentneeds,CFFindicateswhetherthatexcessisusedtorepaydebt,pay(orincrease)cashdividends,orrepurchaseoutstandingshares.c.CashpaymentsforinterestshouldbeclassifiedasCFFforpurposesofanalysis.Thisclassificationseparatestheeffectoffinancialleveragedecisionsfromoperatingresults.ItalsofacilitatesthecomparisonofPalombawithotherfirmswhosefinancialleveragediffers.d.Thechangeincashhasnoanalyticsignificance.Thechangeincash(andhence,thecashbalanceattheendoftheyear)isaproductofmanagementdecisionsregardingfinancing.Forexample,thefirmcanshowalargecashbalancebydrawingonbanklinesjustpriortoyearend.e.andf.Thereareanumberofdefinitionsoffreecashflows.Inthetext,freecashflowisdefinedascashfromoperationslesstheamountofcapitalexpendituresrequiredtomaintainthefirm’scurrentproductivecapacity.Thisdefinitionrequirestheexclusionofcostsofgrowthandacquisitions.However,fewfirms3-2provideseparatedisclosuresofexpendituresincurredtomaintainproductivecapacity.Capitalcostsofacquisitionsmaybeobtainedfromproxystatementsandotherdisclosuresofacquisitions(SeeChapter14).Inthefinanceliterature,freecashflowsavailabletoequityholdersareoftenmeasuredascashfromoperationslesscapitalexpenditures.Interestpaidisadeductionwhencomputingcashfromoperationsasitispaidtocreditors.Palomba’sfreecashflowavailabletoequityholdersiscalculatedasfollows:Netcashflowfromoperatin...
