Lucent Technologies, Inc., was formed from AT&Ts Bell Laboratories research organization after the breakup of AT&T into the Baby Bells. Lucent designs, develops, and manufactures communication systems, supplying these systems to most of the worlds telecom operators for both wired and wireless services for voice, data, and video delivery. In 1999 Lucent reported $38.301 billion in revenues, against $31.806 billion in 1998 and $27.611 billion in 1997. Analysts have complained about the quality of Lucents reported earnings over the years.

A. What questions arise regarding the quality of Lucents earnings for 1997, 1998, and 1999 from the partial cash flow statements in Exhibit 18.5?

EXHIBIT 18.5 Partial Consolidated Statements of Cash Flows (dollars in millions) Year Ended September 30 1999 1998 1997 Operating activities Net income $4,766 $1,035 $ 449 Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of effects from acquisitions of businesses Cumulative effect of accounting change (1,308) 0 0 Business restructuring reversal (141) (100) (201) Asset impairment and other charges 236 0 81 Depreciation and amortization 1,806 1,411 1,499 Provision for uncollectibles 75 149 136 Tax benefit from stock options 367 271 88 Deferred income taxes 1,026 56 (21) Purchased in-process research and development 15 1,683 1,255 Adjustment to conform Ascend and Kenan's fiscal years 169 0 0 Increase in receivables-net (3,183) (2,161) (484) Increase in inventories and contracts in process (1,612) (403) (316) Increase (decrease) in accounts payable 668 231 (18) Changes in other operating assets and liabilities (2,320) 155 (397) Other adjustments for noncash itemsnet (840) (467) 58 Net cash (used in provided by operating activities $ (276) $1,860 $2,129