INTERPRETING THE STATEMENT OF CASH FLOWS. Montgomery Ward operates a retail department store chain. It filed for bankruptcy during the first quarter of Year 12. Exhibit 3.27 presents a statement of cash flows for Montgomery Ward for Year 7 to Year 11. The firm acquired Lechmere, a discount retailer of sporting goods
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Year 11 Year 10
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Year 9
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Year 8
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Year 7
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OPERATIONS
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|
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|
|
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Net income
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$(237)
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$ (9)
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$ 109
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$ 101
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Depreciation
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122
|
115
|
109
|
98
|
97
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|
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Other addbacks
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13
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8
|
24
|
25
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32
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|
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Other subtractions
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(197)
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(119)
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(29)
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-
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-
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(Increase) Decrease in accounts receivable
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(32)
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(54)
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(38)
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(9)
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9
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|
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(Increase) Decrease in inventories
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225
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(112)
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(229)
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(204)
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(38)
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|
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(Increase) Decrease in prepayments
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27
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(32)
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(39)
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(58)
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36
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|
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Increase (Decrease) in accounts payable
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(222)
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85
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291
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148
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(17)
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Increase (Decrease) in other
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|
|
|
|
|
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current liabilities
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(55)
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(64)
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(45)
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28
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(64)
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|
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Cash Flow from Operations
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$(356)
|
$(182)
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$ 153
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$ 129
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$ 155
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INVESTING
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|
|
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Fixed assets acquired
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$ (75)
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$(122)
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$(184)
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$(142)
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$(146)
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|
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Change in marketable securities
|
20
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(14)
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(4)
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(27)
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137
|
|
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Other investing transactions
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(93)
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27
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(113)
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6
|
9
|
|
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Cash Flow from Investing
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$(148)
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$(109)
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$(301)
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$(163)
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$ -
|
|
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FINANCING
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|
|
|
|
|
|
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Increase in short-term borrowing
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$ 588
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$ 16
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$ 144
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$ -
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$ -
|
|
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Increase in long-term borrowing
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-
|
205
|
168
|
100
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-
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|
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Issue of capital stock
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3
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193
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78
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1
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1
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|
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Decrease in short-term borrowing
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-
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-
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-
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-
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-
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|
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Decrease in long-term borrowing
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(63)
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(17)
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(275)
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(18)
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(403)
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|
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Acquisition of capital stock
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(20)
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(98)
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(9)
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(11)
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(97)
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|
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Dividends
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(9)
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(4)
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(24)
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(23)
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(19)
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|
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Other
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-
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-
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1
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2
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2
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Cash Flow from Financing
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$ 499
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$ 295
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$ 83
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$ 51
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$(516)
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|
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Change in Cash
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$ (5)
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$ 4
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$ (65)
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$ 17
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$(361)
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|
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Cash-Beginning of year
|
37
|
33
|
98
|
81
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442
|
|
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Cash-End of Year
|
$ 32
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$ 37
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$ 33
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$ 98
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$ 81
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|
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Change in sales from previous year
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-10.0%
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-.5%
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+17.2%
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+3.7%
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+2.0%
|
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and electronic products, during Year 9. It acquired Amoco Enterprises, an automobile club, during Year 11. During Year 10, it issued a new series of preferred stock and used part of the cash proceeds to repurchase a series of outstanding preferred stock. The "other subtractions" in the operating section for Year 10 and Year 11 represent reversals of deferred tax liabilities.
Required
Discuss the relationship between net income and cash flow from operations and between cash flows from operating, investing, and financing activities for the firm over the five-year period. Identify signals of Montgomery Ward's difficulties that might have led to its filing for bankruptcy.