9.{S}A. The cash outflow of $25.6 million represents the decrease in the balance of sold but uncollected receivables ($192.8 - $167.2). It represents net collections (by Arkla as the firm continues to service the receivables) of receivables sold; amounts collected from previously sold receivables were paid to the purchasers of those receivables.

B. Receivables sold but uncollected as of 12/31/93 can be deduced to be:

Outstanding 3/31/94 $118.7 million

Decrease during quarter 107.7

Outstanding 12/31/93 $226.4 million

C. The required adjustments to Arkla's CFO for quarters ended:

March 31, 1994 March 31, 1995

Cash outflow 107.7 25.6

These amounts are the decrease in receivables sold during the respective quarters. The adjustment is required because the cash flow was recognized when the receivables were sold rather than when customers paid. This adjustment produces a measure of CFO based on when the receivables were collected.


10{L}A. Since December 1991, Morrison Knudsen has sold receivables. Assuming that there was no gain or loss on these sales and that proceeds were used to repay debt, the sold receivables should be added back to the receivables (see below), current assets, and short-term debt (current liabilities).

1990 1991 1992 1993

Reported Accounts Receivable $182,283 $135,253 $160,196 $231,021

Sold Receivables -0- 66,976 87,264 75,937

Adjusted Receivables $ 182,283 $202,229 $247,460 $306,958

Average Receivables: as reported 158,768 147,725 195,609

adjusted 192,256 224,845 277,209

1990 1991 1992 1993

Current Assets Reported $645,440 $658,200 $681,412 $793,221

Adjusted 645,440 725,176 768,676 869,158

Current Liabilities

Reported $404,795 $379,121 $608,730 $689,534

Adjusted 404,795 446,097 695,994 765,471

1992 / 1993
Current ratio / Reported / 1.12 / 1.15
Adjusted / 1.10 / 1.14
Receivables turnover / Reported / 15.47 / 13.92
Adjusted / 10.16 / 9.82
Days Receivables / Reported / 24 / 26
Adjusted / 36 / 37

1993 Computations:

Current ratio: Reported = $793,221/ $689,534 = 1.15

Adjusted = $869,158/ $765,471 = 1.14

Receivables turnover: Reported = $2,722,543/$195,609 = 13.92; days receivables = 365/13.92 = 26

Adjusted = $2,722,543/$277,209 = 9.82; days receivables = 365/9.82 = 37

The cash cycle equals days of receivables plus days of inventories less days of payables. Neither the inventories nor the payables are affected by sales of receivables. Therefore, the receivables sales improved the cash cycle. However, the adjusted data show that the receivables are actually outstanding longer and the firm’s cash cycle increased.

B. / 1992 / 1993
Total debt
Reported / $ 6,214 / $ 47,006
Adjustment / 87,264 / 75,937
Adjusted / $ 93,478 / $122,943
Equity / 375,771 / 406,967
Debt-to-equity
Reported / 0.02 / 0.12
Adjusted / 0.25 / 0.30
Total capital
Reported / $381,985 / $453,973
Adjustment / 87,264 / 75,937
Adjusted / $469,249 / $529,910
EBIT / 36,690 / 66,075
Return on total capital
Reported / 9.6% / 14.6%
Adjusted / 7.8% / 12.5%

Including the sold receivables increases the debt-to-equity ratio significantly for both years. The higher denominator reduces return-on-total-capital. Note that EBIT should be adjusted for interest on sold receivables; however, no information on interest expense or interest rates has been provided.


C.

1990 / 1991 / 1992 / 1993
Receivables sold
Closing / $66,976 / $ 87,264 / $ 75,937
Opening / - / 66,976 / 87,264
Change / $66,976 / $ 20,288 / $(11,327)
Cash flow from operations
Reported / $72,679 / 94,652 / 173,905 / (64,302)
Adjustment / - / (66,976) / (20,288) / 11,327
Adjusted / $72,679 / $27,676 / $153,617 / $(52,975)

The sale of receivables increases the cash flow from operations. In the absence of sales of receivables, the firm would have reported lower CFO in 1991 and 1992. In 1993, the reduced amount of sold receivables reduced CFO. Sales of receivables distort reported CFO in each year as well as year-to-year comparisons.


11.{M} A. First, we compute data required to solve the problem.

($ in millions) / 1993 / 1994
Accounts receivable / Reported / $ 546.0 / $ 742.0
Sold receivables / 263.8 / 296.8
Adjusted receivables / $ 809.8 / $1,038.8
Average receivables / Reported / 644.0
Adjusted / 924.3
Current assets / Reported / 2,078.0 / 2,229.0
Adjusted / 2,341.8 / 2,525.8
Current liabilities / Reported / 1,993.0 / 2,232.0
Adjusted / 2,256.8 / 2,528.8
Total debt / Reported / 1,707.0 / 1,530.0
Adjusted / 1,970.8 / 1,826.8

The ratios can be computed as follows:

1994 / Computations
Current ratio / Reported / 1.00 / $ 2,229 / $ 2,232
Adjusted / 1.00 / $2,525.8/$2,528.8
Receivables turnover / Reported / 7.91 / $ 5,093 / $ 644
Adjusted / 5.51 / $ 5,093 / $ 924.3
Days receivables / Reported / 46 / 365 / 7.91
Adjusted / 66 / 365 / 5.51

The cash cycle equals days of receivables plus days of inventories less days of payables. Neither the inventories nor the payables are affected by sales of receivables. Therefore, sales of receivables, by increasing days of receivables from a reported 46 days to an adjusted 66 days, increases the cash cycle by the same number of days.

B.

1994 / Computations
Debt to equity ratio: Reported / 1.02 / $1,530.0/$1,505.0
Adjusted / 1.22 / $1,826.8/$1,505.0
Return on total capital: Reported / 8.18% / $ 249 / $ 3,045
Adjusted / 7.47% / $ 249/ $ 3.331.8

The adjusted leverage ratio is higher and the adjusted return lower than the reported ratios.

C.

1994
CFO - as reported / $ 454.0
Sold receivables / (33.0)
Adjusted CFO / $ 421.0

The firm reported an increase of 87% in CFO. However, the increase in receivables sold inflated CFO by recognizing the proceeds of sale sooner than if the receivables had been collected in the normal course of business. To compare with 1993 CFO, we would need to know the change in receivables sold during that year as well.

Additional Solutions Chapter 11 – P. 1