Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8...
Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 statement of cash flows (indirect method).
PHILIP MORRIS COMPANIES, INC.
Statement of Cash Flows
For the Year Ended December 31, Year 8 ($ millions)
Cash flows from operating activities
Net income............................................................. $ 2,337
Add (deduct) adjustments to cash basis
Depreciation expense........................................ 654
Amortization of goodwill.................................... 125
Decrease in accounts receivable....................... 601
Decrease in inventories..................................... 2
Decrease in deferred taxes................................ (325)
Increase in accounts payable............................ 408
Increase in accrued liabilities............................ 1,041
Increase in income taxes payable...................... 362
Net cash flow from operating activities................. $ 5,205
Cash flows from investing activities
Increase in property, plant & equipment
(before depreciation)........................................... (980)
Increase in goodwill (before amortization)............. (783)
Decrease in investments....................................... 405
Acquisition of subsidiary—Kraft *......................... (11,383)
Net cash used by investing activities.................... (12,741)
Cash flows from financing activities
Decrease in short‑term debt................................. (881)
Increase in long‑term debt.................................... 9,929
Decrease in equity (repurchase) **........................ (540)
Dividends declared............................................... (941)
Increase in dividends payable............................... 47
Net cash provided by financing activities.............. 7,614
Net increase in cash............................................. $ 78
Instructions
Compute Philip Morris’s free cash flow for Year 8. Discuss how free cash flow impacts the company’s future earnings and financial condition.
Homework Answers
free cash flow = Cash from Operations - capital expenditure
= $5205 - $980
= $4225
Understanding free cash flow gives you true insight into how much capital you have left to reinvest in your business and pay yourself.
When future cash flow increases
If your FCF is going up, this could be because of a number of reasons:
- Selling corporate assets
- Reducing capital expenditure
- Accounts payable payments have been delayed
- Accounts receivable payments have been accelerated
- Cutting back on maintenance and marketing costs
- Delaying employee payments
- Recently closed a big deal and received a sizeable deposit
When FCF decreases
On the other hand, when you see FCF going down, this could be attributed to:
- Increase in working capital
- Large inventory order
- Equipment investments
- Rapid growth
Add Answer to:
Following the acquisition of Kraft during Year 8, the Philip
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Debit
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July 31
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Debit
Credit
Balance
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Balance
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Nov. 10
Accumulated depreciation on equipment sold
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40,300
Dec. 31
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Debit
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Use the following information regarding the Newcastle Corporation
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Remember to use negative signs with answers when
appropriate.
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Equipment
Date
Debit
Credit
Balance
Jan. 1
Balance
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July 31
Purchase of equipment
71,200
230,800
Sept. 2
Cost of equipment constructed
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Nov. 10
Cost of equipment sold
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Date
Debit
Credit
Balance
Jan. 1
Balance
70,500
Nov. 10
Accumulated depreciation on equipment sold
30,200
40,300
Dec. 31
Depreciation for year
23,800
64,100
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Credit
Balance
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