Question

included in Appetit LO13-1, LO13-2, LO13-4 EXERCISE 13.15 Home Depot, Inc. Using a Statement of Cash Flows Statements of cash flow for Home Depot, Inc., for 2013, 2014, and 2013 are include of this text. a. Focus on the information for 2015 (year ending January 31, 2010). How does compare with net cash provided by or used in operations, and what accounts for the difference between the two amounts? does not eating unts for the per

Answer 1

a. Net earnings differ from net cash generated from operations mainly due to the fact that net earnings are expressed in accrual terms where as the net cash from operations is expressed in cash terms. Net cash from operations is calculated by adding the non cash expenses and subtracting the non cash incomes from the net income. It also includes changes in working capital on cash basis.

The primary difference is on account of non cash items. For eg. depreciation which you see is added back to the net earnings as it is a non cash item.

b. The major uses of cash other than operations are use for investing and financing activities.

Investing activities: Over the three year period if you analyze you would see that the company has been involved in investing in capital assets and acquiring business.There has been negative cash from investing activities in all three years and each year there seems to be increase in capital expenditures. Which means the company is building its infrastructure. Also there is a substantial expense in terms of acquiring business in 2016 which can mean that the company is trying to expand its business.

Financing activities: The company has borrowed a substantial amount in 2016 amounting to $2000 and the repayment has stayed the same. The company also borrowed in 2014 of an amount of $5222. This borrowing every year is making the company a debt levered company, which is not a good sign as the cost of servicing debts are also increasing. The repurchase of stock in 2016 and 2015 are $7000 each which is lower than in 2014. Again this shows that the debt-equity ratio is increasing. The dividends paid is also showing an increasing trend which means that the company is ploughing back less profits from business than what is being earned.

c. No this does give a negative interpretation of the cash position on year end. If you look at the cash flow you would see cash has increased in net from last year $1723 in 2015 to $2216 in 2016. It is true that the cash from investing activities and financing activities is negative, but one must keep in mind that this activities are just divisions of where cash has been utilized. As long as the cash from operations is positive it means company is making cash profits which is fundamental to business operations and going concern factor. If one has surplus cash it can choose to invest it wherever possible. The capital expenditures and business acquisitions may be profitable as it might increase the business revenue/profitability and productivity in future. The increase in borrowings and repurchase of stock puts the company on the side of a debt levered company which may hamper the company in future, but it's just a sign, as long as the company can generate cash profits after servicing the debt nothing is to be worried about.

d. Free cash flow formula:

Free cash flow= cash from operations - capital expenditures

Particulars	2015	2014	2013
Cash from operations (a)	$9373	$8242	$7628
Capital expenditures(b)	$1503	$1442	$1389
Free cash flow (c) = (a) - (b)	$7870	$6800	$6239