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Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. The assignment involves analyzing the company's cash flow statements and related financial data to answer specific questions about its cash flow reporting methods, tax payments, adjustments for certain expenses, dividend payments, and free cash flow. Additionally, there is an exercise to prepare a statement of cash flows for XS Supply Company using the indirect method based on the provided financial data.

Paper For Above instruction

Urban Outfitters' Cash Flow Reporting Method

Understanding the manner in which a company reports its cash flows provides insight into its financial transparency and operational practices. Urban Outfitters, a major retailer in the apparel industry, utilizes the indirect method to report its cash flows from operating activities, as evidenced by the presentation of adjustments to net income such as depreciation, amortization, and share-based compensation. This method starts with net income and makes adjustments for non-cash expenses and changes in working capital, which is consistent with the company's financial statement disclosures. The indirect method is prevalent among large publicly traded companies due to its ability to reconcile net income with net cash provided by operating activities, making it easier to analyze the sources and uses of cash within the company.

Analysis of Tax Payments

Examining Urban Outfitters’ statement of cash flows reveals that the company made tax payments totaling $120,847 thousand during the most recent reporting year. This figure is typically located near the bottom of the cash flows statement, under the section detailing cash flows from operating activities, providing transparency on cash outflows related to tax obligations. The ability to directly see tax payments helps in assessing the company's liquidity and tax management strategies. The tax payments reflect the company's cash expenditure on statutory taxes, essential for understanding its cash position and financial health.

Reason for Adjustments in Cash Flow Reconciliation

In the reconciliation of net income to net cash provided by operating activities, expenses such as share-based compensation and depreciation and amortization are added back to net income. These adjustments are necessary because both are non-cash expenses that reduce net income but do not involve actual cash outflows during the period. Depreciation and amortization represent the allocation of the cost of tangible and intangible assets over time, which does not impact cash. Similarly, share-based compensation, a form of employee remuneration, is a non-cash expense recognized in the income statement, hence its addition to net income in the cash flow calculation ensures an accurate depiction of cash generated by operating activities.

Dividend Payments Analysis

Assessing whether Urban Outfitters paid cash dividends in the last three years requires examining the cash flow statement and the notes to the financial statements. The available data indicates that the company did not declare or pay dividends during the last three years, as explicitly stated. The absence of dividend payments can be inferred from the financing activities section, which shows no cash outflows related to dividends. This might suggest that the company focused on reinvesting earnings into the business or preferred to retain cash for operational needs or growth strategies.

Calculating Free Cash Flow for 2012

Free cash flow (FCF) measures the cash available after capital expenditures to expand or maintain the asset base. For the year ended January 31, 2012, the calculation involves adjusting net cash provided by operating activities for capital expenditures. Based on the data, if Urban Outfitters’ net cash from operating activities is available, and capital expenditures are known or can be derived from the statement, then FCF = Net cash from operating activities - Capital expenditures. This metric is crucial as it indicates the company's ability to generate cash that can be used for debt repayment, dividends, or reinvestment, reflecting its financial flexibility.

Analysis of XS Supply Company’s Cash Flows

The exercise involving XS Supply Company requires preparing a statement of cash flows using the indirect method for the year ended December 31, 2014. Starting with net income of $12,200 thousand, adjustments for non-cash expenses such as depreciation ($12,000 thousand) and gains on sale of equipment ($1,000 thousand) need to be made. The cash flows from investing activities will include cash paid for new equipment ($31,000 thousand) and cash received from the sale of equipment (original cost $10,000, accumulated depreciation $7,000, sold for $4,000). Financing activities involve cash received from issuing stock ($16,000 thousand) and payments toward long-term debt ($6,000 thousand). These components are essential in illustrating how operational, investing, and financing activities have altered the company's cash balance during the year.

The comprehensive preparation involves systematically adjusting net income, adjusting for non-cash transactions, and analyzing the cash inflows and outflows related to investing and financing. This process highlights the practical application of the indirect method in presenting transparent and informative cash flow statements. The analysis of XS Supply’s cash flow activities not only fulfills accounting standards but also offers insights into the company's liquidity, operational efficiency, and financial strategy.

References

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