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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
Year 11 Year 10
Year 9
Year 8
Year 7
OPERATIONS
Net income
$(237)
$ (9)
$ 109
$ 101
Depreciation
122
115
109
98
97
Other addbacks
13
8
24
25
32
Other subtractions
(197)
(119)
(29)
-
(Increase) Decrease in accounts receivable
(32)
(54)
(38)
(9)
9
(Increase) Decrease in inventories
225
(112)
(229)
(204)
(Increase) Decrease in prepayments
27
(39)
(58)
36
Increase (Decrease) in accounts payable
(222)
85
291
148
(17)
Increase (Decrease) in other
current liabilities
(55)
(64)
(45)
28
Cash Flow from Operations
$(356)
$(182)
$ 153
$ 129
$ 155
INVESTING
Fixed assets acquired
$ (75)
$(122)
$(184)
$(142)
$(146)
Change in marketable securities
20
(14)
(4)
(27)
137
Other investing transactions
(93)
(113)
6
Cash Flow from Investing
$(148)
$(109)
$(301)
$(163)
$ -
FINANCING
Increase in short-term borrowing
$ 588
$ 16
$ 144
Increase in long-term borrowing
205
168
100
Issue of capital stock
3
193
78
1
Decrease in short-term borrowing
Decrease in long-term borrowing
(63)
(275)
(18)
(403)
Acquisition of capital stock
(20)
(98)
(11)
(97)
Dividends
(24)
(23)
(19)
Other
2
Cash Flow from Financing
$ 499
$ 295
$ 83
$ 51
$(516)
Change in Cash
$ (5)
$ 4
$ (65)
$ 17
$(361)
Cash-Beginning of year
37
33
81
442
Cash-End of Year
$ 32
$ 37
$ 33
$ 98
$ 81
Change in sales from previous year
-10.0%
-.5%
+17.2%
+3.7%
+2.0%
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.
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.
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