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