Preparing and interpreting the statement of cash flows
The annual reports from Year 7 and Year 8 of The GAP, a global clothing retailer, indicate the following changes in its balance sheet accounts (amounts in millions):
|
Year 7 |
Year 8 |
|
|
Cash |
$ 2 decrease |
$428 increase |
|
Marketable securities (current asset) |
46 decrease |
46 decrease |
|
Merchandise inventories |
96 increase |
154 increase |
|
Prepaid expenses |
1 increase |
56 increase |
|
Property, plant and equipment (at cost) |
372 increase |
466 increase |
|
Accumulated depreciation |
215 increase |
270 increase |
|
Other noncurrent assets |
51 increase |
15 increase |
|
Accounts payable |
114 increase |
134 increase |
|
Notes payable to banks (current liability) |
18 increase |
45 increase |
|
Income taxes payable |
26 increase |
7 decrease |
|
Other current liabilities |
90 increase |
123 increase |
|
Bonds payable |
–– |
577 increase |
|
Common stock |
360 decrease |
524 decrease |
|
Retained earnings |
369 increase |
455 increase |
Abbreviated income statements for The GAP appear below:
|
Year 7 |
Year 8 |
|
|
Sales |
$5,284 |
$6,508 |
|
Cost of goods sold |
-3,285 |
-4,022 |
|
Selling and administrative expenses |
-1,250 |
-1,632 |
|
Income tax expense |
-296 |
-320 |
|
Net income |
$453 |
$534 |
Additional data:
- The cash balance was $486 at the end of Year 7 and $914 at the end of Year 8.
- The firm did not sell property, plant and equipment in either year.
- Changes in other noncurrent assets resulted from investing activities.
Required
(a) Prepare statements of cash flows for Year 7 and Year 8.
(b) Comment on the relationship between net income and cash flow from operations, and on the relationship between operating, investing, and financing cash flows. Compare Year 7 with Year 8.