The comparative statements of cash flows for Cole Corporation, a manufacturer of high-quality suits for men, follow. To expand its markets and familiarity with its brand, the company attempted a new strategic diversification in 2011 by acquiring a chain of retail men’s stores in outlet malls. Its plan was to expand in malls around the country, but department stores viewed the action as infringing on their territory.

REQUIRED

Evaluate the success of the company’s strategy by answering the questions that follow.

1. What are the primary reasons cash flows from operating activities differ from net income? What is the effect of the acquisition in 2010? What conclusions can you draw from the changes in 2011?

2. Compute free cash flow for both years. What was the total cost of the acquisition? Is the company able to finance expansion in 2010 by generating internal cash flow? What was the situation in 2011?

3. What are the most significant financing activities in 2010? How did the company finance the acquisition? Do you think this is a good strategy? What other issues might you question in financing activities?

4. Based on results in 2011, what actions was the company forced to take, and what is your overall assessment of the company’s diversification strategy?

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Cole Corporation Statement of Cash Flows For the Years Ended December 31,2011 and 2010 (in thousands) 2011 2010 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income 5 (42,050) 74,200 to net cash flows from operating activities Depreciation Loss on closure of retail outlets Changes in current assets and current liabilities 49,100 71,150 70,000 Decrease (increase) in accounts recelvable Decrease (increase) in inventory Decrease (increase) in prepaid expenses Increase (decrease) in accounts payable Increase (decrease) in accrued llabilities Increase (decrease) in income taxes payable 98,700 119,300 2,570 57,630 3,000 (16,000) $406,350 $ 364300 (86,250) (98,475) 4,200 2,500 (5,360) 11,361) $(145,646) 5 71446) Net cash flows from operating activities Cash flows from investing activities $ (60,890) (395,000) (455,890) Capital expenditures, net $(31,200) Purchase of Retail Division, cash portion Net cash flows from Investing activities S (31,200) Cash flows from financing activities $ 453,500 (21,500) (39,640) (25,000) 367,360 (159,976) 204,500 S 44,524 Increase (decrease) in notes payable to banks $(247,000) (18,050) (45,400) Reduction in long-term debt Payment of dividends Purchase of treasury stock Net cash flows from financing activities Net increase (decrease) in caslh Cash at beginning of year Cash at end of year $(310,450) $ 22,650 44,524 67,174 Schedule of Noncash Investing and Financing Transactions Issue of bonds payable for retail acquisition $102,000