Question 17.8: Sunbeam Statement of Cash Flows As noted in the previous sec......
Sunbeam Statement of Cash Flows
As noted in the previous section, Sunbeam engaged in various improper accounting practices. Refer to the excerpt from Sunbeam’s statement of cash flows in Exhibit 24 to answer the following questions:
1. One of the ways that Sunbeam misreported its financial statements was improperly inflating and subsequently reversing restructuring charges. How do these items appear on the statement of cash flows?
2. Another aspect of Sunbeam’s misreporting was improper revenue recognition. What items on the statement of cash flow would primarily be affected by that practice?
| EXHIBIT 24 Excerpt from Sunbeam’s Consolidated Statement of Cash Flows, 1995–1997 ($ thousands) | |||
| Fiscal Years Ended | 28 Dec. 1997 | 29 Dec. 1996 | 31 Dec. 1995 |
| Operating Activities: | |||
| Net earnings (loss) | 109,415 | (228,262) | 50,511 |
| Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | |||
| Depreciation and amortization | 38,577 | 47,429 | 44,174 |
| Restructuring, impairment, and other costs | — | 154,869 | — |
| Other non-cash special charges | — | 128,800 | — |
| Loss on sale of discontinued operations, net of taxes | 13,713 | 32,430 | — |
| Deferred income taxes | 57,783 | (77,828) | 25,146 |
| Increase (decrease) in cash from changes in working capital: | |||
| Receivables, net | (84,576) | (13,829) | (4,499) |
| Inventories | (100,810) | (11,651) | (4,874) |
| Account payable | (1,585) | 14,735 | 9,245 |
| Restructuring accrual | (43,378) | — | — |
| Prepaid expenses and other current assets and liabilities | (9,004) | 2,737 | (8,821) |
| Income taxes payable | 52,844 | (21,942) | (18,452) |
| Payment of other long-term and non-operating liabilities | (14,682) | (27,089) | (21,719) |
| Other, net | (26,546) | 13,764 | 10,805 |
| Net cash provided by (used in) operating activities | (8,249) | 14,163 | 81,516 |
| Note: The reason that an increase in sales is shown as a negative number on the statement of cash flows prepared using the indirect method is to reverse any sales reported in income for which cash has not yet been received. | |||
to 1: Sunbeam’s statement of cash flows is prepared using the indirect method (i.e., the operating section shows a reconciliation between reported net income and operating cash flow). This reconciliation highlights that the amount of non-cash charges recorded in 1996 for restructuring, impairment, and other costs totaled about $284 million ($154.869 million + $128.8 million). In the following year, the reversal of the restructuring accrual was $43 million. By inflating and subsequently reversing restructuring charges, the company’s income would misleadingly portray significant improvements in performance following the arrival of its new CEO in mid-1996.
to 2: The items on the statement of cash flows that would primarily be affected by improper revenue recognition include net income, receivables, and inventories. Net income and receivables would be overstated. The statement of cash flows, in which an increase in receivables is shown as a negative number, highlights the continued growth of receivables. In addition, Sunbeam’s practice of recording sales that lacked economic substance—because the purchaser held the goods over the end of an accounting period but subsequently returned all the goods—is highlighted in the substantial increase in inventory in 1997.