Question

Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 financial statements. The Year 8 financial statements and other data are reproduced on the next page.
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PHILIP MORRIS PURCHASE OF KRAFT
Allocation of Purchase Price (\$ millions)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 758
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,232
Property, plant, and equipment. . . . . . . . . . . . . . . . . . . . . . 1,740
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,361
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (578)
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (530)
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (900)
Purchase price (net of cash acquired) . . . . . . . . . . . . . . . . \$11,383

Required:
a. Prepare a statement of cash flows (indirect method) for Philip Morris. (Hint: Acquisition of Kraft requires you to remove the assets acquired and liabilities incurred as a result of that acquisition from the balance sheet before computing changes used in preparing the statement of cash flows. Philip Morris pays \$11.383 billion for Kraft, net of cash acquired-see the Allocation of Purchase Price table.)
b. Calculate cash flows from operations using the direct method for Philip Morris.
c. Based on your answer to a, compute Philip Morris's free cash flow for Year 8. Discuss how free cash flow impacts the company's future earnings and financialcondition.

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