PROBLEM 5.8 Preparing and Interpreting the Statement of Cash Flows

The annual reports from year7 and year 8 of the GAP, a global clothing retailer, indicate the following changes in its balance sheet accounts (amounts in million)

	Year 7	Year 8
Cash	2 increase	428 increase
Marketable Securities (Current Asset)	46 Decrease	46 Decrease
Merchandise Inventories	96 Increase	154 Increase
Prepaid Expenses	1 Increase	56 Increase
Property, plant and equipment (at cost)	372 Increase	466 Increase
Accumulated Depreciation	215 Increase	270 Increase
Other Non-Current Assets	51 Increase	15 Increase
Accounts Payable	114 Increase	134 Increase
Notes payable to banks (current Liability)	18 Increase	45 Increase
Income Taxes Payable	26 Increase	7 decrease
Other Current Liabilities	90 Increase	123 Increase
Bonds Payable		577 Increase
Common Stock	360 Decrease	524 Decrease

Retained Earnings

369 Increase

455 Increase

Additional Income Statement for the GAP appear below:

	year7	Year 8
Sales	5284	6508
Cost of Goods Sold	-3285	-4022
Selling and A&G Expense	-1250	-1632

Income Tax Expense	-296	-320
Net Income	453	534

Additional Data:

The Cash balance was $486 at the end of the Year 7 and $914 at the end of Year 8.

The firm did not sell property, plant and equipment in either year.

Changes in other noncurrent assets resulted from investing activities.

Required:

Prepare statements of cash flows for Year 7 and Year 8.

Comment on the relationship between net income and CFFO and the relationship between operating, investing, and financing cash flows. Compare Year 7 and Year 8.