Cash Flows and Capital Expenditures

Signature Assignment:  Cash Flows and Capital Expenditures

Daniel Armstrong

Azusa Pacific Online University

Abstract

The financial information for this paper was pulled from the Statement of Cash Flows, which can be found in Item 8 of the form 10-K that the Sears Holding Corporation filed with the SEC in March of 2015.  This section is titled Financial Statements and Supplementary Data.  Along with this, information was also pulled from the companies major purchases, which can be found in the section titled Property Plant and Equipment footnote.  In this paper the author will identify where the major sources of cash flows are coming in and where the major uses of cash flows are going out in the firm's Statement of Cash Flow.

Cash flow is the lifeblood of any business.  If you were able to gather a group of business owners into a room together and ask them what one thing they would need in order to make their business successful you would undoubtedly get some different answers.  One person might say that they need a good location, or effective marketing, or a product that is in high demand.  All of these answers would be correct.  But there is one thing that is essential in order for a business to be successful that they would all agree on.  That is that they need available cash.  Cash is like gasoline to an automobile.  You need enough fuel in the gas tank in order to get the car started, and you need to keep enough in the tank in order to keep the car running (Cash 2015).  Even a company that is shown to be profitable according to accounting standards can go under if there isn't enough cash on hand to pay bills.

Every year all publicly traded companies have to declare where they have cash coming in and where they have cash going out.  Businesses do this in a separate section of their 10-K.  This section is called the Statement of Cash flows.  A Statement of Cash Flows is broken up into three main sections.  These sections are cash flows from Operating Activities, cash flows from Investing activities, and cash flows from financing activities.  The Operating Activities section measures the cash used or provided by a company's normal operations.  The Investing Activities section catalogs all the money spent or earned by the buying and selling of income producing assets.  The Financing Activities section gauges the flow of money between a company and its creditors (The Essentials 2105).  The following paper will contain an analysis of Sears Holding Corporations Statement of Cash flows, and it will attempt to identify the major areas where Sears has money coming and money going out.  

As with most other areas of Sears Holding Corporation’s financial statements there was a net loss posted on the Statement of Cash Flows.  For the years of 2012, 2013, and 2014 Sears Holding Corporation posted a net loss of $1 billion, $1.1 billion, and $1.8 billion dollars respectively.  These are huge losses and they most likely go back many years farther than 2012.  There have been multiple areas where Sears has posted a net loss over the last couple of years.  These areas are spread out among the operating, financing, and investing activities.  The largest losses for the operating activities came in deferred taxes ($719 mill), merchandise payable ($528 mill), and pension and post retirement plan contribution ($450 mill).  The deferred taxes are shown on the Statement of Cash flows because Sears has chosen to use the indirect method.  When using this method any increase in a deferred tax asset or decrease in a deferred tax liability is subtracted as part of adjustments to net income (How Deferred 2015).  Since Sears is a retailer it is easy to see how their merchandise payable would be so high.  They have to purchase goods in order to sell them to their customers.  The pension and post retirement benefits are being paid out to employees who were hired prior to 2004.  According to Crean (2006), “Sears froze its pension as of Jan. 1. But in 2004, before its merger with Kmart Corp., Sears stopped offering pensions to new workers and cut off existing employees below age 40 from building benefits.”  The areas where Sears had the highest positive cash inflows were Merchandise Inventories and Deferred tax valuation allowance, which were about $1.1 billion and $840 million respectively.