Hertz case

Topics: Income statement, Generally Accepted Accounting Principles, Cash flow statement Pages: 6 (1387 words) Published: September 20, 2013
1) Hertz makes five adjustments (ignoring ‘Other adjustments’) to net income before including the changes in operating assets and liabilities. List each of these five items and explain why each of these items is added (subtracted) from net income to calculate Net Cash Provided by Operating Activities.

Answer:

The five adjustments to net income before including the changes in operating assets and liabilities in the consolidated statement of cash flows of Hertz Global Holdings, Inc. are listed as follows;

Explanation:

Since the net income reported in the statement of cash flows is transferred from the profit and loss account which is the difference between revenue and expenditures all of two types;

(a) Those expenditures that relate to transactions in which cash is involved and are actually paid from cash and cash equivalent or are directly credited from the company’s bank account(s).

(b) Those expenditures where no cash is involved and hence are deemed as non-cash expense/items. Such expenses do not reflect any change on the cash held in bank. However, such expenses do have an effect on the income as follows;

Depreciation on revenue earning equipment and property and equipment is regarded as a non-cash item since depreciation is an expense which is being incurred against the usage of equipment due to wear and tear thereby declining its total value over its useful life and hence has nothing to do with any change in the cash. Similarly, the amortization of other intangible assets is also a non-cash item as it is decline in cost of intangible over its useful life or in other words utilization of economic benefits being derived from such asset of that particular amount and hence has no effect on the cash.

As mentioned above, such expenses are also subtracted from the revenue in order to reach at a loss of ($ ‘000 111,343). In the statement of cash flows all such expenses are added back to such loss to calculate the income/ (loss) which is realized in cash as in cash flow statement only cash items are considered to show the cash inflows and outflows over the year.

Stock based compensation charges is also a non-cash expense because the company has awarded stocks to its employees however nothing is transacted in from of cash except when the employee exercises the option and intends to encash his /her share. Therefore, it is also added back to the net loss to calculate the actual loss realized in cash.

Gain on sale of property and equipment is the difference between the sale proceeds received in cash or kind from the buyer and the book value. Of course the proceeds received in cash are reported in the investing activity in cash flow statement but the gain is not realized in cash and hence regarded as non-cash item. However, it will increase the income. As it has been added to income in the profit and loss account, therefore, it must be subtracted in the cash flow statement in order to reach at the actual amount of profit/ (loss) realized in cash by the company.

2) Did receivables increase or decrease from the end of 2008 to the end of 2009? Did accounts payable increase or decrease from the end of 2008 to the end of 2009?

Answer:

The receivables has been decreased from the end of 2008 to the end of 2009 because a positive balance in the operating activities in the cash flow indicate cash inflow which shows that all the rentals due from customers are collected and thus have resulted in the increase in cash flow from operations as follows;

The accounts payable have been also decreased from the end of 2008 to the end of 2009 because a negative balance in the operating activities in the cash flow indicate cash outflow which shows that all amounts due to supplier have been paid off in the year ending December 31, 2009 resulting in decrease in cash flow from operations amounting to ($ ‘000’ 227,479)

3) As indicated on the cash flow statement, Hertz sold some property and...
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