Lands’ End recently implemented a strategy of filling nearly all orders when the order is placed. In what year do you believe the company implemented this strategy and how is the strategy reflected in the information contained in the statement of cash flows?

1.      Lands’ End recently implemented a strategy of filling nearly all orders when the order is placed. In what year do you believe the company implemented this strategy and how is the strategy reflected in the information contained in the statement of cash flows?

It seems like Lands’ End implemented a strategy of filling orders when order is placed in year 8. In the year 8 the amount of inventories are reduced by 104,545 and receivable reduced by 7019 where the previous year receivable reduction was 675.

2.      Explain how the following items reconcile net income to net cash flows from operating activities:

a)      Depreciation:

Cash flow statement shows the inflow and out flow of the cash. Depreciation is the non cash expenses. Cash out flow occur when company actually purchased the tangible assets. Depreciation allocates the cost of those tangible assets over the useful life. In income statement to matches the expenses of the company against the revenue generated by those assets, company deducts the depreciation from the income. Since, company does not outflow money allocated for depreciation, Company add back amount of depreciation in cash flow.

b)      Receivables

In income statement total amount (Cash + Credit) of sales generation is recorded and consider credit sales as the revenue generation and count it as cash inflow. In fact credit sales are the actual inflow of cash. Hence in statement of cash flow, the credit sales are reduced from the net income. In some situation, cash could have collected early for the services provided now. In such case the money is recorded on deferred recognition of the revenue.

c)      Inventory

In the income statement inventory is recorded as cost of goods sold. The inventory sold from the ware house. Net income does not reflect the exact amount spend on inventories during the year.   The inventory recorded on income statement varies according to inventory costing methods. However, in the income statement actual purchased/sales amount is recorded on cash flow statement. When inventory is purchased amount is reduced from net income and when sold amount is add on income statement.

d)     Reserve for returns

3.      Calculate free cash flows for each year shown.

Free cash flow = Cash from operation – capital expenditure – Dividend

For the year 9

Free cash flow= 74,260 – 46,750

                        = 27,510.

For the year 8

Free cash flow = -26,932 – 35, 309

                        = -62,241.

For the year 7

Free cash flow = 121,795 – 18,481

                        = 10,334.

4.      How does Lands’ End use its free cash flow? Do you think its use of free cash flows reflects good financial strategy?

Lands’ End mostly uses its free cash flow to repurchase their stocks and rests are sitting in the bank. Company could have invest some of its free cash flow on marketable securities or other short or long term maturity investment depending on the requirement of the company to use the free cash flow.