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Question: The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company鈥檚 complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2012, 2013, and 2014? Which two items were most responsible for the decrease in net cash provided by operating activities in 2014?

(b) What was the most significant item in the cash flows used for investing activities section in 2014?

What was the most significant item in the cash flows used for financing activities section in 2014?

(c) Where is 鈥渄eferred income taxes鈥� reported in P&G鈥檚 statement of cash flows? Why does it appear in that section of the statement of cash flows?

(d) Where is depreciation reported in P&G鈥檚 statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

Step by step solution

01

Definition of Statement of Cash Flow

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

02

Method used for calculation of net cash flow

The P & G Company has used an indirect method to prepare the cash flow statement.

Year	Net cash provided by operating activities
2012	$13,284
2013	$14,873
2014	$13,958

The two items responsible for the decrease in the net cash provided by the operating activities are changes in operating assets and liabilities and the change in the accounts payable.

03

Significant items

Cash flow used for investing activity: Capital expenditure of $3,848.

Cash flow used for financing activity: Dividend paid to shareholders $6,911.

04

Reporting of deferred income tax

Deferred income taxes are reported in the operating activity section of the cash flow statement. These are deducted in the reconciliation of the net income because these are non-cash benefits.

05

Reporting of depreciation

The operating activity section of the cash flow statement reports the depreciation expenses. It is added to the net income reconciliation because it is a non-cash expense reported in the income statement

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