Nojiri Phamarceutical Industries

Balance Sheets
(amounts in millions)

March 31: Year 4 Year 3 Year 2

ASSETS
Cash 6,233 4,569 4,513
Accounts and notes receivable - Trade 19,003 17,828 19,703
Inventories 7,693 7,948 8,706
Deferred income taxes 1,355 1,192 948
Prepayments 432 325 640
Total Current Assets 34,716 31,862 34,510
Investments 3,309 2,356 3,204
Property, plant, and equipment, at cost 71,792 71,510 71,326
Less accumulated depreciation (40,689) (38,912) (36,854)
Deferred income taxes 236 1,608 1,481
Other assets 4,551 3,904 3,312
Total Assets 73,915 72,328 76,979
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts and notes payable - Trade 10,087 9,629 10,851
Notes payable to banks 10,360 10,328 9,779
Current portion of long-term debt 100 200 0
Other current liabilites 7,200 6,170 9,779
Total Current Liabilities 27,747 26,327 30,409
Long-term debt 8,140 7,889 6,487
Deferred income taxes 3,361 0 0
Employee retirement benefits 809 905 1,087
Other noncurrent liabilities 175 174 200
Total Liabilities 40,232 35,295 38,183
Common stock 10,758 10,758 10,758
Additional paid-in capital 15,012 15,012 15,012
Retained earnings 9,179 11,838 13,697
Accumulated other comprehensive income (342) (490) (659)
Treasury stock (924) (85) (12)
Total Shareholders' Equity 33,683 37,033 38,796
Total Liabilities and Shareholders' Equity 73,915 72,328 76,979

Worksheet for Preparation of Statement of Cash Flows

Year 2

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (246) (246)
(2) Inventories (99) (99)
(3) Deferred income taxes (124) (124)
(4) Prepayments (6) (6)
(5) Investments in securities 1793 1793
(6) Property, plant, and equipment cost (308) (308)
(7) Accumulated depreciation 1057 1057
(8) Deferred income taxes (987) (987)
(9) Other assets 151 151
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(9) Accounts payable 47 47
(10) Notes payable (244)
(11) Current portion of long-term debt 0
(12) Other current liabilities 2214 2214
(13) Long-term debt (1660)
(14) Deferred income taxes 0 0
(15) Employee retirement benefits (79) (79)
(16) Other noncurrent liabilities (16)
(17) Common stock 0
(18) Additional paid-in capital 0
(19) Retained earnings (1317) (357)
(20) Accumulated other comprehensive income (659) (659)
(21) Treasury stock (12)
(22) Cash (495) 1420 977

Worksheet for Preparation of Statement of Cash Flows

Year 3

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable 1875 1875
(2) Inventories 758 758
(3) Deferred income taxes (244) (244)
(4) Prepayments 315 315
(5) Investments in securities 848 848
(6) Property, plant, and equipment cost (184) (184)
(7) Accumulated depreciation 2058 2058
(8) Deferred income taxes (127) (127)
(9) Other assets (592) (592)
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(9) Accounts payable (1222) (1222)
(10) Notes payable 549
(11) Current portion of long-term debt 200
(12) Other current liabilities (3609) (3609)
(13) Long-term debt 1402
(14) Deferred income taxes 0
(15) Employee retirement benefits (182) (182)
(16) Other noncurrent liabilities (26)
(17) Common stock 0
(18) Additional paid-in capital 0
(19) Retained earnings (1859) (1088)
(20) Other accumulated comprehensive income 169 169
(21) Treasury stock (73)
(22) Cash 56 (1466) 241

Worksheet for Preparation of Statement of Cash Flows

Year 4

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (1175) (1175)
(2) Inventories 255 255
(3) Deferred income taxes (163) (163)
(4) Prepayments (107) (107)
(5) Investments in securities (953) (953)
(6) Property, plant, and equipment cost (282) (282)
(7) Accumulated depreciation 1777 1777
(8) Deferred income taxes 1372 1372
(9) Other assets (647) (647)
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(9) Accounts payable 458 458
(10) Notes payable 32
(11) Current portion of long-term debt (100)
(12) Other current liabilities 1030 1030
(13) Long-term debt 251
(14) Deferred income taxes 3361 3361
(15) Employee retirement benefits (96) (96)
(16) Other noncurrent liabilities 1
(17) Common stock 0
(18) Additional paid-in capital 0
(19) Retained earnings (2659) (1872)
(20) Other accumulated comprehensive income 148 148
(21) Treasury stock (839)
(22) Cash 1664 4840 (1734)

Noriji Pharmaceuticals
Statement of Cash Flows
(amounts in millions)
 Year Ended March 31
Year 4 Year 3 Year 2
Operations
Net Income (Loss) (1,872) (1,088) (357)
Depreciation 1,777 2,058 1,057
Deferred Income Taxes 4,570 (371) (1,111)
Employee Retirment Benefits (96) (182) (79)
(Increase) Decrease in Accounts Receivable (1,175) 1,875 (246)
(Increase) Decrease in Inventories 255 758 (99)
(Increase) Decrease in Prepayments (107) 315 (6)
Increase (Decrease) in Accounts Payable 458 (1,222) 47
Increase (Decrease) in Other Current Liabilities 1,030 (3,609) 2,214
Cash Flow from Operations 4,840 (1,466) 1,420

Investing
Acquisition of PPE (282) (184) (308)
(Acquisition) Sale of Invesment in Securities (805) 1,017 1,134
Other Investing Transactions (647) (592) 151
Cash Flow from Investing (1,734) 241 977

Financing
Increase (Decrease) in Short-Term Debt 32 549 (244)
Increase (Decrease) in Long-Term Debt 151 1,602 (1,660)
Dividends (787) (771) (960)
Reacquisition of Treasury Stock (839) (73) (12)
Other Financing Transactions 1 (26) (16)
Cash Flow from Financing (1,442) 1,281 (2,892)
Change in Cash 1,664 56 (495)
Cash - Beginning of Year 4,569 4,513 5,008
Cash - End of Year 6,233 4,569 4,513
 Nojiri Pharmaceutical Industries
Income Statements
(amounts in millions)

Year 1 Year Ended March 31 Year 4 Year 3

5,008 Sales 41,352 41,926

19,457 COGS (27,667) (27,850)
8,607 Selling and administrative expenses (13,396) (15,243)
824 Interest expense (338) (364)
634 Income tax expense (1,823) 443
34,530 Net Income (1,872) (1,088)
4,997
71,018
(35,797)
494
3,463
78,705 Year CFO CFI
2 1420 977
10,804 3 (1466) 241
10,023 4 4840 (1734)
0
7,565
28,392
8,147
0
1,166
216
37,921
10,758
15,012
15,014
0
0
40,784
78,705

ws

Financing
 The sale of investments results in a cash inflow of
1,134(=1793 - 659)

Deferred income taxes result in a subtraction from NI when

computing CFO of 1,111(=124 + 987)

(244)
0

(1660)

(16)
0
0
(960)

(12)
(2892)

ws

Financing

The sale of investments results in a cash inflow of

1,017(=848 + 169)

Deferred income taxes result in a subtraction from NI when

computing CFO of 371 (=244 + 127)

549
200

1402 LT debt increased net by 1602 (=1402 + 200)

 LT debt increased net by 1602 (=1402 + 200)

(26)
0
0
(771)

(73)
1281

ws

Financing

The purchase of investments results in a cash outflow of 805

(=953-148)

Deferred income taxes result in a net addition to NI when

computing CFO of 4,570 (=1,372 + 3,361 - 163)

32
(100)

251 Long-term debt increased net by ¥151 (¥251 – ¥100).

Year 2:
1 + Net income was negative but cash flow from operations was p
0 primarily because Nojiri stretched payments on other current lia
0 + Nojiri also sold investment securities to generate cash. It used
(787) operations and sale of investment securities to repay long-term
pay a dividend.
Stretching short-term creditors to repay long-term debt and a di
(839) is usually not financially prudent because the other current liabi
(1442) payment within one year.
Note the large subtraction of deferred income taxes. It appears
at a profit for income tax reporting and had to pay income taxes
reports an income tax credit on the income statement for financ

Year 3:
+ The net loss increased between fiscal Year 2 and fiscal Year 3,
cash flow from operations turned negative. In addition to the ne
reason for the negative cash flow from operations is decreased a
payable and other current liabilities. Nojiri stretched some of th
fiscal Year 2 and had to pay them in fiscal Year 3.
+ Note that Nojiri reduced its accounts and notes receivable and
Year 3, aiding its cash flow from operations. Depreciation, a non
increased significantly.
+ Nojiri sold investments in securities and increased its short-ter
Year 3:
+ The net loss increased between fiscal Year 2 and fiscal Year 3,
cash flow from operations turned negative. In addition to the ne
reason for the negative cash flow from operations is decreased a
payable and other current liabilities. Nojiri stretched some of th
fiscal Year 2 and had to pay them in fiscal Year 3.
+ Note that Nojiri reduced its accounts and notes receivable and
Year 3, aiding its cash flow from operations. Depreciation, a non
increased significantly.
+ Nojiri sold investments in securities and increased its short-ter
debt to offset the negative cash flow from operations.
+ The firm continued to pay
a dividend despite its operating and cash flow problems.

Year 4:
+ The net loss increased still further in fiscal Year 4, but cash flow
operations turned positive. The principal reason is an increase in
deferred income taxes. Nojiri must have carried forward positive
of earlier years and received a tax benefit in fiscal Year 4, or it op
even larger loss for income tax reporting than for financial repor
+ Note that despite relatively stable sales between fiscal Year 3 a
Nojiri experienced an increase in accounts and notes receivable
other current liabilities.
+ Nojiri used the cash flow from operations to purchase investm
pay dividends, and to repurchase shares of its common stock.

Summary: One wonders about the wisdom of continuing to pay

repurchasing common stock in light of the mounting net losses f
Nojiri still has an excess of current assets over current liabilities.
proportion of liabilities in the capital structure continues to incre
proportion of shareholders’ equity continues to decrease. The lo
this firm may be questionable
tries

Year 2

44,226
(28,966)
(15,283)
(368)
34
(357)

CFF Net change in cash

(2892) (495)
1281 56
(1442) 1664
ash flow from operations was positive,
d payments on other current liabilities.
urities to generate cash. It used the cash from
nt securities to repay long-term borrowing and to

o repay long-term debt and a dividend

because the other current liabilities require

ferred income taxes. It appears that Nojiri operated

ng and had to pay income taxes even though it
the income statement for financial reporting.

n fiscal Year 2 and fiscal Year 3, and

d negative. In addition to the net loss, the principal
w from operations is decreased accounts
ties. Nojiri stretched some of these creditors in
m in fiscal Year 3.
counts and notes receivable and inventories in fiscal
operations. Depreciation, a non-cash expense,
rities and increased its short-term and long-term
 n fiscal Year 2 and fiscal Year 3, and
d negative. In addition to the net loss, the principal
w from operations is decreased accounts
ties. Nojiri stretched some of these creditors in
m in fiscal Year 3.
counts and notes receivable and inventories in fiscal
operations. Depreciation, a non-cash expense,

rities and increased its short-term and long-term

flow from operations.
and cash flow problems.

her in fiscal Year 4, but cash flow from

principal reason is an increase in the addback for
ust have carried forward positive taxable income
x benefit in fiscal Year 4, or it operated at an
eporting than for financial reporting.
ble sales between fiscal Year 3 and fiscal Year 4,
accounts and notes receivable. It also increased

operations to purchase investment securities, to

e shares of its common stock.

he wisdom of continuing to pay dividends and

ght of the mounting net losses from operations.
nt assets over current liabilities. However, the
pital structure continues to increase and the
ty continues to decrease. The long-term viability of
 Flight Training Corporation
Balance Sheets
(amounts in thousands)

December 31: Year 4 Year 3 Year 2

ASSETS
Cash 159 583 313
Accounts and notes receivable - Trade 6,545 4,874 2,675
Inventories 5,106 2,514 1,552
Prepayments 665 829 469
Total Current Assets 12,475 8,800 5,009
Property, plant, and equipment, at cost 106,529 76,975 24,039
Less accumulated depreciation (17,231) (8,843) (5,713)
Net property, plant, and equipment 89,298 68,132 18,326
Other assets 470 665 641
Total Assets 102,243 77,597 23,976
CURRENT LIABILITIES
Accounts payable 12,428 6,279 993
Notes payable 0 945 140
Current portion of long-term debt 60,590 7,018 1,789
Other current liabilites 12,903 12,124 2,423
Total Current Liabilities 85,921 26,366 5,345
NONCURRENT LIABILITIES
Long-term debt 0 41,021 9,804
Deferred income taxes 0 900 803
Other noncurrent liabilities 0 0 226
Total Liabilities 85,921 68,287 16,178
SHAREHOLDERS' EQUITY
Common stock 34 22 21
Additional paid-in capital 16,516 5,685 4,569
Retained earnings (29) 3,802 3,208
Treasury stock (199) (199) 0
Total Shareholders' Equity 16,322 9,310 7,798
Total Liabilities and Shareholders' Equity 102,243 77,597 23,976

Worksheet for Preparation of Statement of Cash Flows

Year 2

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (185) (185)
(2) Inventories (950) (950)
(3) Prepayments (412) (412)
(4) Property, plant, and equipment cost (6,230) (6,230)
(5) Accumulated depreciation 1,425 1,425
(6) Other assets 471 471
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(7) Accounts payable 54 54
(8) Notes payable (881)
(9) Current portion of long-term debt 685
(10) Other current liabilities 1,113 1,113
(11) Long-term debt 3,066
(12) Deferred income taxes 803 803
(13) Other noncurrent liabilities 226
(14) Common stock 1
(15) Additional paid-in capital 246
(16) Retained earnings 739 739
(17) Treasury stock -
(18) Cash 171 2,587 (5,759)

Worksheet for Preparation of Statement of Cash Flows

Year 3

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (2,199) (2,199)
(2) Inventories (962) (962)
(3) Prepayments (360) (360)
(4) Property, plant, and equipment cost (52,936) (52,936)
(5) Accumulated depreciation 3,130 3,130
(6) Other assets (24) (24)
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(7) Accounts payable 5,286 5,286
(8) Notes payable 805
(9) Current portion of long-term debt 5,229
(10) Other current liabilities 9,701 9,701
(11) Long-term debt 31,217
(12) Deferred income taxes 97 97
(13) Other noncurrent liabilities (226)
(14) Common stock 1
(15) Additional paid-in capital 1,116
(16) Retained earnings 594 594
(17) Treasury stock (199)
(18) Cash 270 15,287 (52,960)
 Worksheet for Preparation of Statement of Cash Flows
Year 4

Amounts of
Balance Sheet Accounts Balance Sheet Operating Investing
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (1,671) (1,671)
(2) Inventories (2,592) (2,592)
(3) Prepayments 164 164
(4) Property, plant, and equipment cost (29,554) (29,554)
(5) Accumulated depreciation 8,388 8,388
(6) Other assets 195 195
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(7) Accounts payable 6,149 6,149
(8) Notes payable (945)
(9) Current portion of long-term debt 53,572
(10) Other current liabilities 779 779
(11) Long-term debt (41,021)
(12) Deferred income taxes (900) (900)
(13) Other noncurrent liabilities -
(14) Common stock 12
(15) Additional paid-in capital 10,831
(16) Retained earnings (3,831) (3,831)
(17) Treasury stock -
(18) Cash (424) 6,486 (29,359)

Flight Training Corporation

Statement of Cash Flows
(amounts in millions)

Year Ended March 31

Year 4 Year 3 Year 2
Operations
Net Income (Loss) (3,831) 594 739
Depreciation 8,388 3,130 1,425
Deferred Income Taxes (900) 97 803
(Increase) Decrease in Accounts Receivable (1,671) (2,199) (185)
(Increase) Decrease in Inventories (2,592) (962) (950)
(Increase) Decrease in Prepayments 164 (360) (412)
Increase (Decrease) in Accounts Payable 6,149 5,286 54
Increase (Decrease) in Other Current Liabilities 779 9,701 1,113
Cash Flow from Operations 6,486 15,287 2,587

Investing
Acquisition of PPE (29,554) (52,936) (6,230)
Other Investing Transactions 195 (24) 471
Cash Flow from Investing (29,359) (52,960) (5,759)

Financing
Increase (Decrease) in Short-Term Debt (945) 805 (881)
Increase (Decrease) in Long-Term Debt 12,551 36,446 3,751
Increase in Common Stock 10,843 1,117 247
Reacquisition of Treasury Stock - (199) -
Other Financing Transactions - (226) 226
Cash Flow from Financing 22,449 37,943 3,343
Change in Cash (424) 270 171
Cash - Beginning of Year 583 313 142
Cash - End of Year 159 583 313
 Flight Training Corporation
Income Statements
(amounts in thousands)

Year 1 Year Ended March 31 Year 4 Year 3 Year 2

142 Sales 54,988 36,597 20,758

2,490 Costs of services 47,997 29,594 14,247
602 Selling and administrative 5,881 2,972 3,868
57 Interest 5,841 3,058 1,101
3,291 Income taxes (900) 379 803
17,809 2.202088 Total Expenses 58,819 36,003 20,019
(4,288) Net Income (3,831) 594 739
13,521
1,112
17,924

939
1,021
1,104
1,310
4,374

6,738
0
0
11,112

20
4,323
2,469
0
6,812
17,924

ows

Financing
 (881)
685

3,066

226
1
246
-
-
3,343

ows

Financing

805
5,229

31,217

(226)
1
1,116
-
(199)
37,943
ows

Financing

(945)
53,572

(41,021)

-
12
10,831
-
-
22,449
(Increase in LT debt + Current portion of LT debt)
0.763031
+ Cash flow from operations exceeded net income during Year 2 because of the addbacks for depreciation
and deferred taxes.

+ Changes in current assets slightly exceeded changes in current liabilities, suggesting effective working
capital
management.

+ Cash flow from operations was insufficient to fund expenditures on property, plant, and equipment. The
firm used primarily long-term debt to finance the shortfall from operating cash flows to acquire these fixed
assets.

+ Net income declined between Year 2 and Year 3, but cash flow from operations increased significantly.
However, the increased cash flow from operations results primarily from increases in accounts payable and
other current liabilities. The firm had insufficient cash to pay its suppliers and, therefore, stretched the
payment time.

+ The firm substantially increased its purchase of property, plant, and equipment during Year 3, financing its
purchases with cash flow from operations and additional long-term debt. The use of operating cash flows to
finance purchases of fixed assets is generally undesirable if it occurs, as it does in this case, from stretching
short-term suppliers.

+ Net income turns negative in Year 4 primarily because of a substantial increase in depreciation expense
from purchases of epreciable assets in the current and prior years. Cash flow from operations is positive
because of the
addback for depreciation expense and the continued stretching of accounts payable to suppliers. Flight
payment time.

+ The firm substantially increased its purchase of property, plant, and equipment during Year 3, financing its
purchases with cash flow from operations and additional long-term debt. The use of operating cash flows to
finance purchases of fixed assets is generally undesirable if it occurs, as it does in this case, from stretching
short-term suppliers.

+ Net income turns negative in Year 4 primarily because of a substantial increase in depreciation expense
from purchases of epreciable assets in the current and prior years. Cash flow from operations is positive
because of the
addback for depreciation expense and the continued stretching of accounts payable to suppliers. Flight
Training Corporation again spent significant amounts on property, plant, and equipment, financing the
purchases partly with additional long-term debt and partly with issuances of common stock.
dbacks for depreciation

ng effective working

nt, and equipment. The

ws to acquire these fixed

ncreased significantly.
in accounts payable and
efore, stretched the

uring Year 3, financing its

of operating cash flows to
his case, from stretching

depreciation expense
operations is positive

e to suppliers. Flight
uring Year 3, financing its
of operating cash flows to
his case, from stretching

depreciation expense
operations is positive

e to suppliers. Flight
ment, financing the
mon stock.
 BTB Electronics Inc.
Balance Sheets
(amounts in thousands)

December 31: Year 9 Year 8

ASSETS
Cash 367 475
Accounts and notes receivable - Trade 2,545 3,936
Inventories 2,094 2,966
Prepayments 122 270
Total Current Assets 5,128 7,647
Property, plant, and equipment, net 4,027 4,598
Other assets 456 559
Total Assets 9,611 12,804
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 796 809
Notes payable to banks 2,413 231
Other current liabilites 695 777
Total Current Liabilities 3,904 1,817
Long-term debt 2,084 4,692
Deferred income taxes 113 89
Total Liabilities 6,101 6,598
Preferred stock 289 289
Common stock 85 85
Additional paid-in capital 4,395 4,392
Retained earnings (1,259) 1,440
Total Shareholders' Equity 3,510 6,206
Total Liabilities and Shareholders' Equity 9,611 12,804

Worksheet for Preparation of Statement of Cash Flows

Year 8

Amounts of
Balance Sheet Accounts Balance Sheet Operating
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable (168) (168)
(2) Inventories (632) (632)
(3) Prepayments (154) (154)
(4) Property, plant, and equipment net (792) 641
(5) Other assets (366) 25
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(6) Accounts payable (769) (769)
(7) Notes payable to Banks 220
(8) Other current liabilities (299) (299)
(9) Long-term debt 2,339
(10) Deferred income taxes (37) (37)
(11) Preferred stock 289
(12) Common stock 2
(13) Additional paid-in capital 7
(14) Retained earnings 405 417
(15) Change in Cash 45 (976)

Worksheet for Preparation of Statement of Cash Flows

Year 9

Amounts of
Balance Sheet Accounts Balance Sheet Operating
Changes
(INCREASE) DECREASE IN ASSETS
(1) Accounts receivable 1,391 1,391
(2) Inventories 872 872
(3) Prepayments 148 148
(4) Property, plant, and equipment net 571 625
(5) Other assets 103 40
INCREASE (DECREASE) IN LIABILITIES AND SHAREHOLDERS'EQUITIES
(6) Accounts payable (13) (13)
(7) Notes payable to Banks 2,182
(8) Other current liabilities (82) (82)
(9) Long-term debt (2,608)
(10) Deferred income taxes 24 24
(11) Preferred stock -
(12) Common stock -
(13) Additional paid-in capital 3
(14) Retained earnings (2,699) (2,691)
(15) Change in Cash (108) 314
 Flight Training Corporation
Income Statements
(amounts in thousands)

Year 7 Year Ended March 31 Year 9 Year 8

430 Sales 11,960 22,833

3,768 COGS (11,031) (16,518)
2,334 Selling and administrative expenses (3,496) (4,849)
116 Interest expense (452) (459)
6,648 Income taxe expense 328 (590)
3,806 Net Income (2,691) 417
193 Dividends of preferred stock (8) (12)
10,647 Net Income Available to Common (2,699) 405

1,578
11
1,076
2,665
2,353
126
5,144
0
83
4,385
1,035
5,503
10,647

h Flows

Investing Financing

(1,433) (Investing = Changes in PPE - Depreciation)

(391) (Investing = Changes in other assets - Amortization)

220

2,339
 289
2
7
(12)
(1,824) 2,845

h Flows

Investing Financing

(54)
63

2,182

(2,608)

-
-
3
(8)
9 (431)
+ Sales growth rate: Largest
Year 1, then somewhat incr
4.

+ Year 0:
CFO exceeded NI primari
its accounts payable to fina
of a growing firm.
CFO was not sufficient to
term and long-term financin
"matching principle".

+ Year 1:
Gap experenced a net los
growth rate. The firm decre
and stretched payments to
cash flow from operations i
added back to make CFO hi
Gaps reduced its expendit
results. The investments we
term borrowing from Year 0

+ Year 2:
An increase in growth rate
increased inventories and s
approximate NI plus Deprec
Gap cut back on fixed ass
expenditures. Gap increase
the new debt issued, given
in marketable securities and

+ Year 3:
Sales and net income inc
more effective inventory co
though sales increased. It re
in substantially increased ca
securities and repaid long-t
weathered the downturn in

+ Year 4: Another drastic s

increase in net income. Cas
finance acquisitions of fixed
still further and reacquire o
+ Sales growth rate: Largest increase in sales during Year 0. Sales declined sharply in
Year 1, then somewhat increased in Year 2 and Year 3 before declining again in Year
4.

+ Year 0:
CFO exceeded NI primarily because of the add back of depreciation. Gap increased
its accounts payable to finance its purchase of inventories. These patterns are typical
of a growing firm.
CFO was not sufficient to finance the growth in fixed assets. Gap used both short-
term and long-term financing to make up the difference, which is against the
"matching principle".

+ Year 1:
Gap experenced a net loss of $8 million, which is consistent with the slump in sale
growth rate. The firm decreased inventories in light of the slowdown in sales growth
and stretched payments to suppliers and other current liabilities, resulting in larger
cash flow from operations in Year 1 than in Year 0. Beside, significant depreciation
added back to make CFO higher than in Year 0 despite its net loss.
Gaps reduced its expenditures on fixed assets considerably due to weak operating
results. The investments were financed with long-term borrowing and repaid short-
term borrowing from Year 0.

+ Year 2:
An increase in growth rate of sales led to a more typical pattern of NI and CFO. Gap
increased inventories and stretched payments on other current liabilities. CFO
approximate NI plus Depreciation.
Gap cut back on fixed assets purchase, generating an excess CFO over capital
expenditures. Gap increased its long-term borrowing in Year 2. One wonders about
the new debt issued, given the excess cash flow. Gap invested some of the cash flow
in marketable securities and some simply in cash

+ Year 3:
Sales and net income increased still further in Year 3. Gap must have instituted
more effective inventory controls in that year because it reduced its inventory even
though sales increased. It reduced expenditures on fixed assets still further, resulting
in substantially increased cash flow. The firm invested the cash in marketable
securities and repaid long-term borrowing. By Year 3, the firm appears to have
weathered the downturn in Year 1 and placed itself on solid financial footing

+ Year 4: Another drastic slowdown in the rate of growth in sales and a small
increase in net income. Cash flow from operations was more than sufficient to
finance acquisitions of fixed assets. Gap used the excess to reduce long-term debt
still further and reacquire outstanding common stock.