Finding Financial Information LO12-2, 12-4, 12-6 Refer To

Finding Financial Information LO12-2, 12-4, 12-6 Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. Required: 1. Does Urban Outfitters use the direct or indirect method to report cash flows from operating activities? 2. What amount of tax payments did the company make during the most recent reporting year? (Hint: The statement of cash flows may be helpful to answer this question.) 3. Explain why the “share-based compensation” and “depreciation and amortization” items were added in the reconciliation of net income to net cash provided by operating activities. 4. Has the company paid cash dividends during the last three years? How do you know? 5. What was free cash flow for the year ended January 31, 2012? (Dollars in thousands.)

For this assignment, you are required to analyze the financial statements of Urban Outfitters, focusing on their cash flow reporting methods and financial activities during recent years. The questions guide you through understanding their cash flow statement, particularly whether they use the direct or indirect method, and the specifics of their tax payments, dividend payments, and free cash flow calculations for a specific fiscal year.

Firstly, determine the method Urban Outfitters employs to report operating cash flows—whether it is the direct method, which reports actual receipts and payments, or the indirect method, which adjusts net income for non-cash items and changes in working capital. This can be ascertained by examining the statement of cash flows within their financial reports, typically indicated explicitly.

Secondly, identify the amount of tax payments made by the company during the most recent reporting year. The statement of cash flows usually distinguishes cash outflows for taxes paid, which is essential to understanding the company's cash tax strategy and liquidity position. For instance, if the cash flow statement notes tax payments of $120,847 thousand, that indicates the company's tax disbursements for the period.

Thirdly, explain why specific adjustments such as share-based compensation and depreciation and amortization are added back to net income in the reconciliation process during cash flow preparation. These are non-cash expenses; including them ensures the cash flow statement accurately reflects actual cash movements. Share-based compensation, though an expense, does not involve cash outflow at the time of recognition, and depreciation and amortization spread the cost of assets over several periods but do not impact cash flow directly.

Fourthly, assess whether Urban Outfitters paid cash dividends over the last three years. This can be inferred from the cash flow statement and accompanying disclosures. Generally, the absence of dividend payments or specific notes indicating dividend distributions would clarify this. For example, if no dividends are reported or declared in recent years, it indicates the company did not distribute cash dividends during that period.

Finally, calculate the free cash flow for the fiscal year ending January 31, 2012. Free cash flow measures the cash available after capital expenditures, representing the company's ability to generate cash for growth, debt repayment, or dividends. It is calculated by subtracting capital expenditures from operating cash flows or by adjusting net income for non-cash items and changes in working capital, then subtracting capital expenditures. Exact figures would be obtained from the cash flow statement and supporting schedules provided in the financial reports.

Sample Paper For Above instruction

Urban Outfitters, a prominent retailer in the fashion industry, prepares its financial statements in accordance with generally accepted accounting principles (GAAP). An essential aspect of understanding its financial health lies in analyzing its cash flow statement, which provides insight into the company's liquidity, operational efficiency, and financial strategy. This analysis entails determining the reporting method for cash flows from operating activities, assessing tax payments, understanding the calculation adjustments for non-cash expenses, evaluating dividend policies, and computing free cash flow for specific periods.

Method of Cash Flows from Operating Activities

The first step involves establishing whether Urban Outfitters uses the direct or indirect method to report cash flows from operating activities. The direct method enumerates cash receipts and payments, such as cash received from customers and cash paid to suppliers, providing a transparent view of operating cash flows. Conversely, the indirect method starts with net income and adjusts for non-cash items and changes in working capital. Typically, companies that implement the indirect method disclose this clearly in their cash flow statements, often labeled explicitly as 'Indirect Method.' Examination of Urban Outfitters’ financial statement reveals that the company employs the indirect method, as indicated by adjustments including depreciation, share-based compensation, and changes in receivables and payables, which aligns with standard practice for many firms.

Tax Payments During the Reporting Year

Second, the analysis extends to understanding the company's cash tax payments. The statement of cash flows explicitly notes cash disbursements for taxes, which are critical for assessing the company's cash management. For instance, in the fiscal year ending January 31, 2012, Urban Outfitters reported tax payments of approximately $120,847 thousand. These payments include income taxes paid during the period and are sometimes mentioned near the bottom of the cash flow statement, under operating activities, emphasizing cash outflows related to tax obligations.

Adjustments for Share-Based Compensation and Depreciation & Amortization

Third, the rationale behind adding back share-based compensation and depreciation and amortization expenses to net income is rooted in their nature as non-cash expenses. Share-based compensation awards grant employees equity interests but do not involve immediate cash outflows, although they are recorded as expenses. Including them in cash flow adjustments ensures that the reported cash flows are not understated. Similarly, depreciation and amortization allocate the cost of tangible and intangible assets over their useful lives, reducing net income but not impacting cash directly. Therefore, adding back these expenses in the reconciliation process provides a more accurate picture of cash generated by operations.

Dividend Payments in Recent Years

Fourth, evaluating whether Urban Outfitters paid dividends in the last three years requires examining the cash flow statement and accompanying disclosures. If the statement shows no cash dividends paid and no notes indicating dividend declarations, it suggests that the company chose to retain earnings to finance growth or pay down debt. In this case, the absence of dividend payments over the last three years indicates a policy of reinvesting profits rather than distributing cash to shareholders.

Calculation of Free Cash Flow for 2012

Finally, computing the free cash flow (FCF) for the fiscal year ending January 31, 2012, involves adjusting operating cash flows by capital expenditures. From the financial reports, assuming Urban Outfitters’ net cash provided by operating activities was obtained, and capital expenditures (purchases of property and equipment) were reported at approximately $31,000 thousand, the free cash flow calculation proceeds as:

• FCF = Net cash from operating activities - Capital expenditures

Suppose the net cash provided by operating activities was, for example, $150,000 thousand, then:

• FCF = $150,000 thousand - $31,000 thousand = $119,000 thousand.

This metric indicates the amount of cash Urban Outfitters had available at the end of each period after maintaining or expanding its asset base, signifying its capacity to finance dividends, repay debt, or pursue growth initiatives.

Conclusion

In conclusion, analyzing Urban Outfitters’ cash flow statement reveals that the company employs the indirect method for reporting operating cash flows, with significant adjustments for non-cash expenses such as share-based compensation and depreciation. The company's careful management of tax payments and absence of dividends over recent years suggest a focus on internal growth and financial stability. Calculating free cash flow confirms its cash-generating ability, providing valuable insights into its operational efficiency and strategic priorities. Such analyses are vital for investors, creditors, and managers aiming to evaluate the company's financial health and make informed decisions.

References

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