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Scheller College of Business

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Now showing 1 - 10 of 22
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    Cash-Flow Reporting Practices for Insurance Proceeds Related to PP&E
    (Georgia Institute of Technology, 2005-06) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    According to SFAS No. 95, Statement of Cash Flows, insurance settlement proceeds received that are directly related to investing activities such as the destruction of a building or damage sustained by equipment are to be reported as investing cash flow. Proceeds received from insurance settlements related to property, plant, or equipment are analogous to proceeds received from the sale or disposal of property, plant, or equipment, and hence, should be afforded similar treatment, as investing cash flow. Companies, however, differ in their treatment of such insurance proceeds. Some companies report them as investing cash flow while others report such cash flows as operating cash flow, potentially distorting cross-company comparisons. Overstatements of operating cash flow can arise when PP&E-related insurance proceeds are included. In this study, we highlight the cash flow reporting practices for insurance proceeds related to property, plant, and equipment and detail the inconsistencies noted.
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    Customer-Related Notes Receivable and Reclassified Cash Flow Provided by Operating Activities
    (Georgia Institute of Technology, 2005-04) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    In February, 2005, the Securities and Exchange Commission directed the Chief Financial Officers of various companies to begin reporting customer-related notes receivable, including sales-type lease receivables, as operating cash flow. The SEC's attention was drawn to this subject, in part, by our April 2004 report titled, "Cash-Flow Reporting Practices for Customer-Related Notes Receivable." In that report we identified various companies who reported as investing cash flow changes in customer-related notes receivable and sale-type lease receivables. Following the SEC's action, these companies will now report changes in the balance of these receivables in the operating section of the statement of cash flows. This update reviews the impact of the SEC's action on the operating cash flows of the companies included in our original report.
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    Adjusted Free Cash Flow and Capital Expenditures of the S&P 100: What Is the Source of Growth in Adjusted Free Cash Flow?
    (Georgia Institute of Technology, 2005-03) Mulford, Charles W. ; Ely, Michael L. ; Martins, Mario ; Patel, Amit
    Noteworthy growth in free cash flow has been well reported over the past few years as company management, financial analysts, and investors increasingly focus on cash flow to validate reported earnings. Unfortunately, the calculation of free cash flow has limitations, just like earnings. For example, as capital expenditures decrease, free cash flow increases by the same amount, and vice versa. Thus, a temporary reduction in capital expenditures could cause reported free cash flow to increase in an unsustainable way. This study examines growth in adjusted operating cash flow (operating cash flow adjusted for nonoperating and nonrecurring items), adjusted free cash flow (similarly adjusted), and capital expenditures for the non-financial firms of the S&P 100 for the years 2000 through 2003. The objective is to measure the extent to which growth observed in adjusted free cash flow is derived from operations or through reductions in capital expenditures. Our results indicate that reductions in capital expenditures have been an important contributing factor to the growth observed in adjusted free cash flow in recent years.
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    Cash Flow Reporting Practices for Interest Paid on Zero Coupon Bonds
    (Georgia Institute of Technology, 2005-03) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    Debt financing, such as bonds and notes payable, comes with an interest cost that is incurred by the borrower and paid to the lender providing compensation for the use of funds. When zero coupon bonds are issued, interest is included in the principal amount or face value of the bonds. Although coupon payments are not made during the life of the bonds, the company accrues interest expense on them, which is paid when the bonds are repurchased or redeemed at maturity. Hence, when a company repurchases or redeems zero coupon bonds, it should classify the cash outflow for the repayment of principal amount received from bondholders as a financing use of cash and the amount paid in excess of the principal as operating use of cash. This study examines the cash flow reporting practices of companies that repurchase or redeem zero coupon bonds. We also evaluate the impact these practices have on the reported cash flows from operating activities. Our results indicate that most companies classify the cash paid towards interest on zero coupon bonds as a financing use of cash. The mean reduction in reported operating cash flow that would be caused by inclusion of interest paid on zero coupon bonds averaged approximately 11%.
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    Cash-Flow Reporting Practices for Customer-Related Notes Receivable: An Update
    (Georgia Institute of Technology, 2005-02) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    In our April 2004 report, "Cash-Flow Reporting Practices for Customer-Related Notes Receivable," we expressed the view that firms who reported as investing cash flow changes in customer-related notes receivable, including sales-type lease receivables, were reporting in a way that appeared to be inconsistent with generally accepted accounting principles. Recently, the Securities and Exchange Commission sent a letter to the CFOs of numerous firms who were following such practices. In the letter the SEC indicated that these firms were violating GAAP, and it called for them to begin reporting such cash-flow activities as operating cash flow. This update reviews the points raised in our original report and highlights the names of several affected firms who we think could show material changes, including both sizable increases and reductions, in operating cash flow.
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    Seeking Guidance for the Dow? Try GDP
    (Georgia Institute of Technology, 2004-12) Mulford, Charles W. ; Ely, Michael L. ; Maloney, Kerianne ; Martins, Mario ; Quiroz, Raul ; Jayaraman, Narayanan
    With the Dow Jones Industrial Average once again trading above 10,000, investors understandably are wondering where the blue chips are headed next. An interesting long-term perspective on the subject can be gained by examining the extent to which Nominal Gross Domestic Product has explained the movement of share prices over time.
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    A Look at Cash Flow and Earnings Growth for the S&P 100
    (Georgia Institute of Technology, 2004-12) Mulford, Charles W. ; Ely, Michael L. ; Martins, Mario ; Patel, Amit
    Excess Cash Margin, ECM, calculated by dividing by revenue the difference between adjusted operating cash flow and adjusted operating earnings, provides useful insight into the relationship between cash flow and earnings. When ECM declines in a consistent manner it indicates that earnings are growing faster or declining more slowly than cash flow. As a result, relative to the scale of operations, increasing levels of non-cash accounts are accumulating on the balance sheet. Earnings generated in this manner, that is, with declining cash flow confirmation, are not sustainable and are at risk for decline. When ECM increases consistently it indicates that operating cash flow is either growing faster or falling more slowly than earnings. As a result, relative to the scale of operations, the balance sheet is being liquidated. Operating cash flow generated in this manner, that is, without consistent earnings support, is not sustainable and is at risk for decline. The better, more sustainable relationship between operating cash flow and earnings is when the two measures grow at consistent rates, resulting in a constant ECM through time. This study calculates ECM for the non-financial firms of the S&P 100 for the years 2000, 2001, 2002, and 2003 and provides commentary on the results. Insights are provided into firms with a declining ECM, an increasing ECM and a stable ECM.
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    Non-Cash Investing and Financing Activities and Free Cash Flow
    (Georgia Institute of Technology, 2004-12) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    Items of property, plant and equipment are often acquired through non-cash investing and financing activities. In these transactions, equipment-purchase financing is provided at the time of purchase. While such transactions increase a company's productive capacity, they are not reported as capital expenditures in the statement of cash flows. Accordingly, free cash flow calculated based on capital expenditures reported in the statement of cash flows will often be overstated when assets are acquired through such non-cash transactions. In this report we look at a series of non-cash investing and financing transactions and assess their effects on calculated free cash flow.
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    Cash-Flow Reporting Practices for Sale and Leaseback Transactions
    (Georgia Institute of Technology, 2004-11) Mulford, Charles W. ; Ely, Michael L. ; Patel, Amit ; Martins, Mario
    In a sale and leaseback transaction an asset is sold and simultaneously leased back. As a result, the seller/lessee relinquishes ownership but not possession of the asset in question, which can be most any long-lived asset, including real estate or equipment. Some firms have even sold and leased back rights to motion picture films. While there is general agreement on the reporting treatment for sales entailing leasebacks that are capital leases, reporting practices differ for sales proceeds when the underlying leasebacks are accounted for as operating leases. Some companies include sale proceeds in the investing section of the statement of cash flows, while others report them as financing cash flow. As a result, calculations of free cash flow that use net capital expenditures, or gross capital expenditures net of the proceeds from asset dispositions, may not be comparable across firms. In this study, we examine and highlight cashflow reporting practices for proceeds from sale and leasebacks for a broad cross-section of firms from various industries.
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    Calculating Sustainable Cash Flow: A Study of the S&P 100 Using 2003 Data
    (Georgia Institute of Technology, 2004-10-26) Mulford, Charles W. ; Ely, Michael L. ; Martins, Mario ; Patel, Amit
    Operating cash flow in 2000, 2001, 2002 and 2003 for the S&P 100 was adjusted to remove items that may provide misleading signals of operating performance. Ten adjustments were made, separated into three categories - (1) where flexibility in GAAP for cash flow reporting was used to alter cash flow, (2) where the requirements of GAAP result in misleading operating cash flow amounts, and (3) where nonrecurring operating cash receipts and payments lead to operating cash flow that is non-sustainable. Adjustments resulted in an average company change in operating cash flow in 2001 of 1.5%, in 2002 of 4.2%, and in 2003 of 0.7%. Certain individual company adjustments were quite significant, resulting in some cases, in much more operating cash flow than actually reported, and in other cases, much less. Many companies had an increase or decrease in operating cash flow of greater than 10% including 35 in 2001, 26 in 2002, and 22 in 2003.