FIN419 University of Phoenix Cash Flow and Strategies to Increase It Calculations

User Generated

Ghegyr71

Business Finance

FIN419

Description

Purpose of Assignment

The purpose of this assignment is to help students gain a better understanding of calculations of cash flow and strategies to increase it.

Assignment Steps

  • Using "Lowes" as our test company

Review the selected company's most recent financial statements.

Calculate the following cash conversion cycle ratios based on the financial statements using Microsoft®Excel®:

  • Average inventory
  • Inventory turnover rate
  • Average account receivable
  • Account receivable turnover
  • Average collection cycle

Explain in 700 words the importance of the cash conversion cycle, including:

  • Discuss the purpose of the cash conversion cycle and its components.
  • Analyze the results obtained in the cash conversion cycle equations.
  • Propose strategies to increase the cash flows of the company under study.

Unformatted Attachment Preview

Lowe’s Companies, Inc. Consolidated Statements of Current and Retained Earnings (Unaudited) In Millions, Except Per Share and Percentage Data Three Months Ended August 2, 2019 Current Earnings Net sales Cost of sales Amount $ 20,992 14,252 Gross margin % Sales Six Months Ended August 3, 2018 Amount 100.00 $ 20,888 67.89 14,003 % Sales August 2, 2019 Amount 100.00 $ 38,733 67.04 26,412 % Sales August 3, 2018 Amount % Sales 100.00 $ 38,247 68.19 25,615 100.00 66.97 6,740 32.11 6,885 32.96 12,321 31.81 12,632 33.03 4,048 19.29 4,386 20.99 7,909 20.42 8,319 21.75 311 1.48 336 1.61 614 1.58 685 1.79 2,381 11.34 2,163 10.36 3,798 9.81 3,628 9.49 169 0.80 153 0.74 331 0.86 313 0.82 2,212 10.54 2,010 9.62 3,467 8.95 3,315 8.67 536 2.56 490 2.34 745 1.92 806 2.11 2,509 6.56 Expenses: Selling, general and administrative Depreciation and amortization Operating income Interest - net Pre-tax earnings Income tax provision Net earnings $ 1,676 Weighted average common shares outstanding - basic Basic earnings per common share (1) $ 781 2.14 Weighted average common shares outstanding - diluted Diluted earnings per common share (1) $ Cash dividends per share 7.98 $ 1,520 7.28 $ 813 $ 1.86 2.14 $ $ 0.55 $ 3,095 — 2,722 788 $ 3.44 1.86 $ $ 0.48 $ 5,405 — 781 7.03 $ 819 $ 3.05 3.44 $ 3.05 $ 1.03 $ 0.89 $ 3,452 (263) $ 5,425 33 814 789 820 Retained Earnings Balance at beginning of period Cumulative effect of accounting change Net earnings 1,676 Cash dividends declared Share repurchases Balance at end of period (1) 1,520 (428) (1,904) $ 2,722 (390) (1,018) 2,439 $ 2,509 (810) (728) (2,662) 5,517 $ (1,722) 2,439 $ 5,517 Under the two-class method, earnings per share is calculated using net earnings allocable to common shares, which is derived by reducing net earnings by the earnings allocable to participating securities. Net earnings allocable to common shares used in the basic and diluted earnings per share calculation were $1,670 million for the three months ended August 2, 2019 and $1,515 million for the three months ended August 3, 2018. Net earnings allocable to common shares used in the basic and diluted earnings per share calculation were $2,713 million for the six months ended August 2, 2019 and $2,500 million for the six months ended August 3, 2018. Lowe’s Companies, Inc. Consolidated Statements of Comprehensive Income (Unaudited) In Millions, Except Percentage Data Three Months Ended August 2, 2019 Amount Net earnings Foreign currency translation adjustments net of tax Other $ Other comprehensive income/(loss) Comprehensive income $ 1,676 % Sales 0.33 — — 69 0.33 1,745 August 3, 2018 Amount 7.98 $ 69 Six Months Ended 8.31 $ 1,520 (70) — (70) 1,450 % Sales August 2, 2019 Amount 7.28 $ (0.34) — (0.34) 6.94 $ 2,722 % Sales August 3, 2018 Amount 7.03 $ 2,509 36 0.09 (154) (14) (0.04) — 22 0.05 2,744 7.08 $ (154) 2,355 % Sales 6.56 (0.40) — (0.40) 6.16 Lowe’s Companies, Inc. Consolidated Balance Sheets In Millions, Except Par Value Data (Unaudited) August 2, 2019 (Unaudited) August 3, 2018 February 1, 2019 Assets Current assets: Cash and cash equivalents $ Short-term investments Merchandise inventory - net Other current assets Total current assets Property, less accumulated depreciation Operating lease right-of-use assets 1,796 $ 2,251 $ 511 275 391 218 13,730 11,885 12,561 995 956 938 16,796 18,203 15,483 19,172 14,228 18,432 3,967 — — Long-term investments 179 87 256 Deferred income taxes - net 512 249 294 Goodwill 303 1,271 303 Other assets 735 843 995 40,695 $ 37,105 $ Total assets $ 34,508 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $ Current maturities of long-term debt — $ 1,009 Current operating lease liabilities Accounts payable Accrued compensation and employee benefits Deferred revenue Other current liabilities — $ 894 722 1,110 492 — — 9,499 8,984 8,279 717 671 662 1,324 1,449 1,299 2,794 2,583 2,425 15,835 16,538 14,581 14,937 14,497 14,391 4,055 — — Deferred revenue - extended protection plans 868 828 827 Other liabilities 759 978 1,149 Total liabilities 38,055 31,324 30,864 — — — 388 406 401 — — — 2,439 5,517 3,452 Total current liabilities Long-term debt, excluding current maturities Noncurrent operating lease liabilities Shareholders' equity: Preferred stock - $5 par value, none issued Common stock - $0.50 par value; Shares issued and outstanding August 2, 2019 776 August 3, 2018 811 February 1, 2019 801 Capital in excess of par value Retained earnings Accumulated other comprehensive loss (187) Total shareholders' equity Total liabilities and shareholders' equity 2,640 $ 40,695 $ (142) 5,781 37,105 $ (209) 3,644 34,508 Lowe’s Companies, Inc. Consolidated Statements of Cash Flows (Unaudited) In Millions Six Months Ended August 2, 2019 Cash flows from operating activities: Net earnings $ August 3, 2018 2,722 $ 2,509 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 684 751 Noncash lease expense 228 — Deferred income taxes (121) (75) Loss on property and other assets - net 38 261 Loss on cost method and equity method investments 12 3 Share-based payment expense 51 62 Changes in operating assets and liabilities: Merchandise inventory - net (1,153) Other operating assets (116) Accounts payable 1,202 Other operating liabilities Net cash provided by operating activities (549) (140) 2,408 36 557 3,583 5,787 Cash flows from investing activities: Purchases of investments (245) Proceeds from sale/maturity of investments 272 Capital expenditures (980) 1,012 (526) (543) Proceeds from sale of property and other long-term assets 42 30 Other - net (1) 1 Net cash used in investing activities (458) (480) (722) (1,137) Cash flows from financing activities: Net change in short-term borrowings Net proceeds from issuance of long-term debt 2,972 Repayment of long-term debt Proceeds from issuance of common stock under share-based payment plans Cash dividend payments Repurchase of common stock Other - net Net cash used in financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents, including cash classified within current assets held for sale Less: Net decrease in cash classified within current assets held for sale Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period $ — (629) (24) 72 50 (767) (678) (2,770) (1,846) (7) (2) (1,851) (3,637) (1) (7) 1,273 1,663 12 — 1,285 1,663 511 588 1,796 $ 2,251 Lowe’s Companies, Inc. Non-GAAP Financial Measures Reconciliation (Unaudited) To provide additional transparency, the company has presented the non-GAAP financial measure of adjusted earnings per share to exclude the impact of certain discrete items, as further described below, not contemplated in Lowe’s original Business Outlook for 2019 to assist the user in understanding performance relative to that Business Outlook. In addition, as part of its Business Outlook for 2019, the company has provided a comparison to the non-GAAP financial measure of adjusted operating margin for fiscal 2018, which excludes the impact of certain discrete items, as further described below, not contemplated in Lowe's original Business Outlook for 2018, to assist the user in further understanding the company's Business Outlook for fiscal 2019 in comparison to fiscal 2018. The company believes these non-GAAP financial measures provide useful insight for analysts and investors in evaluating the company’s operational performance. The company previously announced its intention to exit its Mexico retail operations and had planned to sell the operating business. However, in the first quarter of 2019, after an extensive market evaluation, the decision was made to instead sell the assets of the business. During the second quarter, the Company recognized $14 million of pre-tax operating costs for the ongoing wind-down of the Mexico retail operations which were offset by $3 million tax benefit (Mexico adjustments). During fiscal 2018, the company recognized the following pre-tax charges, not contemplated in the company's original Business Outlook for 2018: • During the fourth quarter of fiscal 2018, the company recorded $952 million of goodwill impairment associated with its Canadian operations (Canadian goodwill impairment); • On August 17, 2018, the company committed to exit its Orchard Supply Hardware operations. As a result, the company recognized pre-tax charges of $230 million during the second quarter of fiscal 2018 associated with longlived asset impairments and discontinued projects. During the third quarter of fiscal 2018, the company recognized pre-tax charges of $123 million associated with accelerated depreciation and amortization, severance and lease obligations. During the fourth quarter of fiscal 2018, the company recognized additional pre-tax charges of $208 million primarily related to lease obligations. Total pre-tax charges for fiscal year 2018 were $561 million (Orchard Supply Hardware charges); • On October 31, 2018, the company committed to close 20 under-performing stores across the U.S. and 31 locations in Canada, including 27 under-performing stores. As a result, the company recognized pre-tax charges of $121 million during the third quarter of fiscal 2018 associated with long-lived asset impairment and severance obligations. During the fourth quarter of fiscal 2018, the company recognized additional pre-tax charges of $150 million, primarily associated with severance and lease obligation costs, as well as accelerated depreciation. Total pre-tax charges for fiscal year 2018 were $271 million (U.S. and Canada store closure charges); • On November 20, 2018, the company announced its plans to exit retail operations in Mexico and is exploring strategic alternatives. During the third quarter, $22 million of long-lived asset impairment was recognized on certain assets in Mexico as a result of the strategic evaluation. During the fourth quarter, an additional $222 million of impairment was recognized. Total charges for fiscal year 2018 were $244 million (Mexico impairment charges); • During the third quarter of fiscal 2018, the company identified certain non-core activities within its U.S. home improvement business to exit, including Alacrity Renovation Services and Iris Smart Home. As a result, during the third quarter of 2018, the company recognized pre-tax charges of $14 million associated with long-lived asset impairment and inventory write-down. During the fourth quarter of fiscal 2018, the company recognized additional pre-tax charges of $32 million. Total pre-tax charges for fiscal year 2018 were $46 million (Non-core activities charges), and; • During the fourth quarter of fiscal 2018, the company recorded pre-tax charges of $13 million, associated with severance costs due to the elimination of the Project Specialists Interiors position (Project Specialists Interiors charge). Adjusted diluted earnings per share and adjusted operating margin should not be considered an alternative to, or more meaningful indicator of, the company’s diluted earnings per share or operating margin as prepared in accordance with GAAP. The company’s methods of determining these non-GAAP financial measures may differ from the method used by other companies for this or similar non-GAAP financial measures. Accordingly, these non-GAAP measures may not be comparable to the measures used by other companies. Detailed reconciliations between the company’s GAAP and non-GAAP financial results are shown below and available on the company’s website at www.lowes.com/investor. Three Months Ended (Unaudited) August 2, 2019 Pre-Tax Earnings (in millions, except per share data) Tax Diluted earnings per share, as reported Non-GAAP adjustments - per share impacts Mexico adjustments 0.02 Orchard Supply Hardware charges — (Audited) February 1, 2019 $ 4,018 Canadian goodwill impairment 952 Orchard Supply Hardware charges 561 U.S. and Canada store closure charges 271 Mexico impairment charges 244 Non-core activities charges 46 Project Specialists Interiors charge 13 Adjusted operating margin 0.01 — — 0.28 $ (in millions, except operating margin) Adjusted operating income Pre-Tax Earnings — Year Ended Operating income, as reported Non-GAAP adjustments Net Earnings $ 2.14 (0.01) Adjusted diluted earnings per share $ 6,105 8.56% (Unaudited) August 3, 2018 2.15 Net Earnings $ 1.86 Tax — — (0.07) 0.21 $ 2.07
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Explanation & Answer

Attached.

Average inventory

beginning inventory
12807,5

ending inventory
11885

13730

Average collection cycle

#NAME?

Account receivable turnover
#VALUE!

Net Credit Sales

Average Accounts Receivable
0o

Average account receivable
#VALUE!

Opening Accounts receivables

closing accounts receivables
0

0

Inventory turnover rate
Cost of Goods Sold
average inventory
1,112785477
14252
12807,5


Running Head: LOWES RATIOS

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Lowes Ratios
Name
Institution
Course
Date

LOWES RATIOS

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Purpose of the Cash Conversion Cycle and Components
The cash conversion cycle refers to a cash flow calculation. It is an essential financial
ratio which measure the time a company takes to convert its inventory investment into cash
(Chang, 2018). The cash flow cycle analysis offers a glimpse at how much time is required
before a company sells its inventory and has available cash. Further, the analysis is essential for
examining accounts payable ledgers, accounts receivables, and inventory. Consequently, positive
cash conversion cycles result when the time recorded ...


Anonymous
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