9.{S}A. The cash outflow of $25.6 million represents the decrease in the balance of sold but uncollected receivables ($192.8 - $167.2). It represents net collections (by Arkla as the firm continues to service the receivables) of receivables sold; amounts collected from previously sold receivables were paid to the purchasers of those receivables. B. Receivables sold but uncollected as of 12/31/93 can be deduced to be: Outstanding 3/31/94 Decrease during quarter Outstanding 12/31/93 C. $118.7 million 107.7 $226.4 million The required adjustments to Arkla's CFO for quarters ended: March 31, 1994 March 31, 1995 Cash outflow 107.7 25.6 These amounts are the decrease in receivables sold during the respective quarters. The adjustment is required because the cash flow was recognized when the receivables were sold rather than when customers paid. This adjustment produces a measure of CFO based on when the receivables were collected. Additional Solutions Chapter 11 – P. 1 10{L}A. Since December 1991, Morrison Knudsen has sold receivables. Assuming that there was no gain or loss on these sales and that proceeds were used to repay debt, the sold receivables should be added back to the receivables (see below), current assets, and shortterm debt (current liabilities). 1990 Reported Accounts Receivable $182,283 Sold Receivables -0Adjusted Receivables $ 182,283 Average Receivables: as reported adjusted 1991 $135,253 66,976 $202,229 158,768 192,256 1992 $160,196 87,264 $247,460 147,725 224,845 1993 $231,021 75,937 $306,958 195,609 277,209 Reported Adjusted 1990 $645,440 645,440 1991 $658,200 725,176 1992 $681,412 768,676 1993 $793,221 869,158 Current Liabilities Reported Adjusted $404,795 404,795 $379,121 446,097 $608,730 695,994 $689,534 765,471 Current Assets Current ratio Reported Adjusted 1992 1.12 1.10 1993 1.15 1.14 Receivables turnover Reported Adjusted 15.47 10.16 13.92 9.82 Days Receivables Reported Adjusted 24 36 26 37 1993 Computations: Current ratio: Reported = $793,221/ $689,534 = 1.15 Adjusted = $869,158/ $765,471 = 1.14 Receivables turnover: Reported = $2,722,543/$195,609 = 13.92; days receivables = 365/13.92 = 26 Adjusted = $2,722,543/$277,209 = 9.82; days receivables = 365/9.82 = 37 The cash cycle equals days of receivables plus days of inventories less days of payables. Neither the inventories nor the payables are affected by sales of receivables. Therefore, the receivables sales improved the cash cycle. However, the adjusted data show that the receivables are actually outstanding longer and the firm’s cash cycle increased. Additional Solutions Chapter 11 – P. 2 B. Total debt Reported Adjustment Adjusted Equity Debt-to-equity Reported Adjusted Total capital Reported Adjustment Adjusted EBIT Return on total capital Reported Adjusted 1992 $ 1993 6,214 87,264 $ 93,478 $ 47,006 75,937 $122,943 375,771 406,967 0.02 0.25 0.12 0.30 $381,985 87,264 $469,249 $453,973 75,937 $529,910 36,690 66,075 9.6% 7.8% 14.6% 12.5% Including the sold receivables increases the debt-toequity ratio significantly for both years. The higher denominator reduces return-on-total-capital. Note that EBIT should be adjusted for interest on sold receivables; however, no information on interest expense or interest rates has been provided. Additional Solutions Chapter 11 – P. 3 C. 1990 Receivables sold Closing Opening Change 1991 $66,976 $66,976 Cash flow from operations Reported $72,679 94,652 Adjustment (66,976) Adjusted $72,679 $27,676 1992 $ 87,264 66,976 $ 20,288 1993 $ 75,937 87,264 $(11,327) 173,905 (64,302) (20,288) 11,327 $153,617 $(52,975) The sale of receivables increases the cash flow from operations. In the absence of sales of receivables, the firm would have reported lower CFO in 1991 and 1992. In 1993, the reduced amount of sold receivables reduced CFO. Sales of receivables distort reported CFO in each year as well as year-to-year comparisons. Additional Solutions Chapter 11 – P. 4 11.{M} A. First, we compute data required to solve the problem. ($ in millions) 1993 1994 Accounts receivable Reported $ 546.0 $ 742.0 Sold receivables 263.8 296.8 Adjusted $ 809.8 $1,038.8 receivables Average receivables Reported 644.0 Adjusted 924.3 Current assets Reported 2,078.0 2,229.0 Adjusted 2,341.8 2,525.8 Current liabilities Reported 1,993.0 2,232.0 Adjusted 2,256.8 2,528.8 Total debt Reported 1,707.0 1,530.0 Adjusted 1,970.8 1,826.8 The ratios can be computed as follows: Current ratio Reported Adjusted Receivables Reported turnover Adjusted Days Reported receivables Adjusted 1994 1.00 1.00 7.91 Computations $ 2,229 / $ 2,232 $2,525.8/$2,528.8 $ 5,093 / $ 644 5.51 46 $ 5,093 / $ 924.3 365 / 7.91 66 365 / 5.51 The cash cycle equals days of receivables plus days of inventories less days of payables. Neither the inventories nor the payables are affected by sales of receivables. Therefore, sales of receivables, by increasing days of receivables from a reported 46 days to an adjusted 66 days, increases the cash cycle by the same number of days. B. 1994 Debt to equity ratio: Reported 1.02 Adjusted 1.22 Return on total capital: Reported 8.18% Adjusted 7.47% Computations $1,530.0/$1,505.0 $1,826.8/$1,505.0 $ 249 / $ 3,045 $ 249/ $ 3.331.8 The adjusted leverage ratio is higher and the adjusted return lower than the reported ratios. Additional Solutions Chapter 11 – P. 5 C. 1994 CFO - as reported $ 454.0 Sold receivables (33.0) Adjusted CFO $ 421.0 The firm reported an increase of 87% in CFO. However, the increase in receivables sold inflated CFO by recognizing the proceeds of sale sooner than if the receivables had been collected in the normal course of business. To compare with 1993 CFO, we would need to know the change in receivables sold during that year as well. Additional Solutions Chapter 11 – P. 6