TEAM SYNERGY

2.44 Interpreting the Statement of Cash Flows

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2) Verizon reported that it invested $16,604 in property, plant and equipment. What relation would you expect between the size of these capital expenditures and the amount of depreciation expense reported?

• As capital expenditure increases, depreciation also increases.

• Because when new fixed assets are purchased, it adds to the depreciation amount.

1) Why does Verizon add back depreciation to compute net cash flows from operating activities? What does the size of the depreciation add-back indicate about the relative capital intensity of the industry?

•Depreciation does not involve a cash inflow or outflow.•Depreciation expense does not reduce cash but net income is reduced.•When the asset was purchased, it already was listed as an outflow under Cash Used In Investing Activities. •After that, all the depreciation entries are just journal entries, none of them involving cash.•So in order to reconcile net income to cash flows from operations, non-cash expenses like depreciation is added back.

IMPLICATIONS:• The future cash flows from financing will be

higher for Verizon, since they have to repay the remaining long-term debts.

• Verizon still have the ability to remain competitive in the industry because they use these debt amount in the capital expenditure to improve their profitability.

3) Verizon’s statement of cash flows indicates that it borrowed $49,166 and repaid $8,163 in principle payments. What implications does this activity have for future cash flows from financing? What implications does it have for Verizon’s ability to remain competitive in its industry?

• Verizon utilize their debts to issue dividends.• Verizon continue to pay dividends given its

cash demands for capital expenditures and debt repayments in order to keep their shareholders satisfied.

4) During the year, Verizon paid dividends and had net share repurchases of $6,004. How do dividends differ from debt payments? Why would Verizon continue to pay dividends given its cash demands for capital expenditures and debt repayments.

5)Provide an overall assessment of Verizon’s cash flows for the current year.

• They get long-term debts to fund their capital expenditure.

• Even though they have huge amount of debts, they pay dividends to their shareholders to satisfy them.

• But, large debts can hinder their competitive position in the market.