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Statement of Cash Flows

The purpose of this mini case is to provide you with a deeper understanding of the Statement of Cash Flows. You will continue using the company you selected for mini case 1. Please submit your mini case on Canvas and include your company’s name on the document that you submit.

Required:

  1. Review the Management Discussion and Analysis (MD&A) section and briefly note any discussion related to the three categories of cash flows.

During 2019, $69.4 billion of cash has been generated from operating activities which is a result of $55.3 billion of net income and other non-cash adjustments to net income of $17.6 billion, partially offset by a decrease in the net change in operating assets and liabilities of $3.5 billion. During 2018, $77.4 billion of cash was generated from operating activities which was a result of $59.5 billion of net income and an increase in the net change in operating assets and liabilities of $34.7 billion which was being partially offset by non-cash adjustments to net income of $16.8 billion.

Cash generated from investing activities during 2019 was $45.9 billion and consisted primarily of cash from sales and maturities of marketable securities. Net purchases of $57.5 billion, partially offset by the cash used to acquire property, plant and equipment of $10.5 billion. Cash generated from investing activities during 2018 was $16.1 billion consisted primarily of proceeds from maturities and sales of marketable securities, net of purchases, of $32.4 billion, partially offset by cash used to acquire property, plant and equipment of $13.3 billion.

During 2019, financing activities consisted primarily of net repayments on borrowings of $8.8 billion, cash dividends of $14.1 billion paid to Apple stockholders and share repurchases of $66.9 billion. During 2018, financing activities consisted primarily of net repayments on borrowings of $6.5 billion, cash dividends of $13.7 billion paid to Apple stockholders and share repurchases of $72.2 billion.

  1. List the net amount of Cash Flows from Operations (CFO) for the past three years and comment on the trend.

(in millions)

2019

2018

2017

Cash provided by operations

69391

77434

64225

CFO has steadily decreased over the past year, suggesting that Apple’s core operations is not doing well.

  1. Calculate the Quality of Income Ratio for the past three years:
    • Comment on its trend.
    • Identify the main reasons for changes in the Quality of Income Ratio.
      1. If relevant, link these reasons to your analyses in prior Modules. For example, if there was a large increase in inventory, did inventory turnover decline? If not, then the increase isn’t problematic.

Quality of income = CFO / NI

(in millions)

2019

2018

2017

Cash provided by operations

69391

77434

64225

Net Income

55256

59531

48351

Quality of Income Ratio

1.26

1.30

1.33

The quality of income ratio declined to 1.26 in 2019 from 1.30 in 2018 and 1.33 in 2017.

The CFO section of the SCF shows that a large decrease in accounts receivable in 2019 vs 2018 accounts for a significant amount of the increase in the ratio. Increase in the inventory is also another reason for the decrease in ratio.

  1. List the net amount of Cash Flows from Investing Activities for the past three years:
    • Comment on the trend.
    • Calculate the Capital Acquisitions Ratio and comment on the company’s ability to finance long-lived asset purchases with cash from operating activities.
    • Did your company sell any long-lived assets? If so, what did it do with the cash?

Investing activities (in millions)

2019

2018

2017

Purchase of marketable securities

(39630)

(71356)

(159486)

Proceeds from maturities of marketable securities

40102

55881

31775

Proceeds from sales of marketable securities

56988

47838

94564

Payments for acquisition of property, plant and equipment

(10495)

(13313)

(12451)

Payments made in connection with business acquisitions, net

(624)

(721)

(329)

Purchases of non-marketable securities

(1001)

(1871)

(521)

Proceeds from non-marketable securities

1634

353

126

Other

(1078)

(745)

(124)

Cash generated by/(used in) for investing

45896

16066

(46446)

(a)Apple has consistently spent cash for investing activities, with a large increase in 2017 related to the acquisition of marketable securities. Apple also consistently invests in its long-lived assets, as reflected in payments for acquisition of property, plant and equipment.

(b)Capital Acquisitions Ratio

= CFO / Cash paid for long-lived assets, net of sales

 

2019

2018

2017

Cash provided by operations

69391

77434

64225

Cash Paid for Long-Lived Assets, net of sales proceeds

10495-1634= 8861

13313-353=12960

12451-126=12325

Capital Acquisitions Ratio

7.83

5.97

5.21

This ratio slightly increased slightly from 2017 to 2018, but then increased substantially from 2018 to 2019. These results indicate that Apple is generating sufficient cash from operations to cover its long-lived asset purchases (net), minimizing the need for external financing.

(c)Apple sold assets in 2019, 2018 and 2017. I searched the 10-K, including the PP&E footnote, but Apple did not indicate how it used the proceeds from the asset sale. The amount is fairly small, so I am not surprised at the lack of disclosure about the sale.

  1. List the net amount of Cash Flows from Financing Activities for the past three years:
    • Comment on the trend.
    • How has the company funded its growth?
    • How do the company’s funding sources affect its risk (solvency)?
    • If your company issued debt, what did it do with the proceeds?

Financing activities:

2019

2018

2017

Proceeds from issuance of common stock

781

669

555

Payments for taxes related to net share settlement of equity awards

(2817)

(2527)

(1874)

Payments for dividends and dividend equivalents

(14119)

(13712)

(12769)

Repurchases of common stock

(66897)

(72738)

(32900)

Proceeds from issuance of term debt, net

6963

6969

28662

Repayments of term debt

(8805)

(6500)

(3500)

Proceeds from/(Repayments of) commercial paper, net

(5977)

(37)

3852

Other

(105)

-

-

Cash used in financing activities

(90976)

(87876)

(17974)

  • In 2019 and 2018, Apple paid out more for debt financing than it took in, while in 2017, Apple paid less amount for term debt.
  • Overall, Apple has been very active with debt financing, while it has not engaged in any substantial equity financing. As noted in mini case 6, Apple purchased common stock to cover employees’ tax withholding liabilities related to equity compensation.
  • Over the past three years, Apple has decreased its long-term debt, which by itself decreases the risk of solvency. Combined with Apple’s decreasing trend in its debt-to-equity ratio and decreased times interest earned ratio (from mini case 5), it appears that Apple has decreased its risk of insolvency.

(d) Apple used the proceeds from its debt financing to pay off existing debt (according to the Debt footnote).

  1. Verify the calculation of Free Cash Flow/Share from the D&B Business Browser for the past three years and comment on its trend.

Free Cash Flow = CFO - Capital Expenditures (net of proceeds) - Cash Dividends

 

2019

2018

2017

Cash provided by operations

69391

77434

64225

Cash Paid for Long-Lived Assets, net of sales proceeds

8861

12960

12325

Cash Dividends

14119

13712

12769

Free Cash Flow

46411

50762

39131

Wtd avg #shares (from the income statement)

4618

4955

5218

Free Cash Flow/Share-as calculated

10.05

10.24

7.50

Free Cash Flow/Share-D&B

Note that D&B doesn’t deduct cash dividends or net proceeds from asset sales in their calculation

4.29

3.24

3.23

Apple’s free cash flow has been positive and has shown improvement over the last two years. Since free cash flow provides a broad measure of a firm’s financial flexibility, positive free cash flow suggests that Apple has the freedom to use its cash flows to pay off debt or expand without resorting to external financing. Overall, this is a positive sign for Apple.

One risk of higher free cash flow, however, is that management can use that cash for so-called “empire building”. Given the modest size of Apple’s free cash flow, I am not too concerned about this issue.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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