I\'ve been reading that the pet care and product industry is somewhat recession-

Question

I've been reading that the pet care and product industry is somewhat recession-resistant,” said Bee Del Conte as you walked with her to the library. “How is it, then, that I hear on the radio this morning that although PetSmart 's net income has increased steadily over the previous three years, its cash flows from its operations last year were down significantly from prior years?” Curious, the two of you stop by a computer terminal on the way to the reference section and do a quick search. A few clicks later you're looking at PetSmart's income statements and cash flow statements for the fiscal year ended February 2, 2014. These are reproduced in the financial statements and related disclosure notes of PetSmart inAppendix B located at the back of this textbook. They also can be found at www.PetSmart.com.

Required:

1. Without regard to PetSmart specifically, explain to Bee the difference between net income and the cash flows from operating activities.

2. Why did PetSmart add $235.4 million in the determination of cash flows from operating activities for depreciation and amortization?

3. A contributor to the difference in PetSmart's net income and cash flows from operating activities and net income in each of the three years presented is a sizable reduction in the amount PetSmart owes its suppliers. If PetSmart had used the direct rather than the indirect method of reporting operating activities, how would this reduction in accounts payable have affected cash from operating activities?

4. Cash outflows for financing activities during each of the three years presented exceeded cash inflows from financing activities. In fact, investing activities also produced net cash outflows in each of the three years. How is that possible? What is the major contributor from year to year in the amount of cash used in financing activities? What are the next two highest contributors to that difference?

Explanation / Answer

1.

Net income includes operating and non operating activities like income from discontinued operations, extraordinary income, expenses etc. Net income includes depreciation, interest, all cash and non cash items.

But cash flow from operating activities includes only cash flow related to operations of the business and the expenses and income related to running the business are included in the cash flow from operating activities. The non cash items are not included in cash flow from operating activities.

2.

For calculating cash flow from operating activities only cash items will be included. Depreciation and amortization expense is a non cash item therefore it is added back to the net income for calculation of cash flow from operating activities.

3.

The decrease in accounts payable will be reduced from the net income for calculation of cash flow from operating activities.

4.

There is net cash outflow from financing activities and investing activities which means the company is using the cash inflow from operating activities for financing and investing activities. It may also be possible that the cash inflow of financing activities are used for investing activities cash outflow and cash inflow of investing activities are used for cash outflow of financing activities.

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