The comparative statements of cash flows for Executive Style Corporation, a manufacturer of high-quality suits for men, appear on the following page. To expand its markets and familiarity with its brand, the company attempted a new strategic diversification in 2010 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 on the acquisition in 2009? What conclusions can you draw from the changes in 2010?

2. Compute free cash flow for both years. What was the total cost of the acquisition? Is the company able to finance expansion in 2009 by generating internal cash flow? What was the situation in 2010?

3. What are the most significant financing activities in 2009? 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 2010, what actions was the company forced to take and what is your overall assessment of the company’s diversification strategy?

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Executive Style Corporation Statement of Cash Flows For the Years Ended December 31, 2010 and 2009 (In thousands) 2009 2010 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to net cash flows from operating activities Depreciation ($ 21,545) $ 38,015 $ 35,219 $ 25,018 Loss on closure of retail outlets 35,000 Changes in current assets and current liabilities Decrease (increase) in accounts receivable Decrease (increase) in inventory Decrease (increase) in prepaid expenses Increase (decrease) in accounts payable Increase (decrease) in accrued liabilities Increase (decrease) in income taxes payable 50,000 60,407 (44,803) (51,145) 1,367 2,246 30,579 1,500 1,266 (2,788) (6,281) ($ 76,487) ($ 38,472) (8,300) $205,772 $184,227 Net cash flows from operating activities Cash flows from investing activities Capital expenditures, net Purchase of Retail Division, cash portion Net cash flows from investing activities ($ 33,112) (201,000) ($ 234,112) ($ 16,145) ($ 16,145) Cash flows from financing activities Increase (decrease) in notes payable to banks Reduction in long-term debt Payment of dividends Purchase of treasury stock Net cash flows from financing activities $ 228,400 ($123,500) (9,238) (22,924) (10,811) (19,973) (12,500) $ 85,116 ($155,662) $ 12,420 16,032 $ 28,452 ($ 87,468) 103,500 Net increase (decrease) in cash Cash at beginning of year Cash at end of year $ 16,032 Schedule of Noncash Investing and Financing Transactions $ 50,000 Issue of bonds payable for retail acquisition