Chapter 5

5.1 Which of the two basic reporting approaches for cash flows from operating activities did the
company adopt?
Dorel uses the indirect approach to report its cash flows from operating activities. We know
this because the company uses its net income as a starting point before making any
adjustments to arrive at a cash position from its operating activities.
5.2 What is the quality of earnings ratio for the most recent year? What are the major causes of
differences between profit and cash flow from operations?
Cash flow
( operating activities )
Quality of Earnings ratio=
N e t Income
Quality of Earnings Ratio=

107,217
= 0.99
108,613

(p.35, Dorels Annual Report 2012)

This equation yields a ratio that shows the extent to which a company can verify its reported income
through hard operational earnings rather than through aggressive accounting methods. High numbers
show a high quality of earnings. According to the textbook "Financial Accounting" by R. Libby, P. A.
Libby, and D. G. Short, (McGraw-hill 2009) it says, "The quality of income ratio measures the
portion of income that was generated in cash." (p.267)
There are four potential causes of differences between profit and cash flow from operations.
1. Corporate Life Cycle: Growth or Decline in sales
2. Seasonality: Seasonal variations in sales and inventory purchases
3. Changes in Revenue and Expense Recognition
4. Changes in Management of Operating Assets & Liabilities

5.3 What is the capital acquisitions ratio for the three-year period in total? (Refer to the ratio
computation in the textbook on page 254.) How is the company financing its capital
expenditures?
Cash Flow

Capital Acquisition Ratio= Operating Activities

Cash paid for Property , PlantEquiment
Cash Flow from Operating Activities (All figures in thousands of US dollars):
2010: 78,018 (p.42, Dorel Annual Report 2010)
2011: 162,477 (p.36, Dorel Annual Report 2011)
2012: 107,217 (p.35, Dorel Annual Report 2012)
Total Cash Flow from Operating Activities: $347,712

Cash Paid for Property, Plant & Equipment (All figures in thousands of US dollars):
2010: 35,465 (p.42, Dorel Annual Report 2010)
2011: Additions - Disposals = 27,975 - 644 = 27,331(p.36, Dorel Annual Report 2011)
2012: Additions - Disposals = 27,020 166 = 26,854 (p.35, Dorel Annual Report 2012)
Total cash paid for Property, Plant & Equipment = $89,650
Capital Acquisition Ratio=

347,712
=3.88
89,650

Dorel is financing most of its capital expenditures using its cash generated from its operating
activities. A high capital acquisition ratio like 3.88 indicates that Dorel does not require
much outside financing.
5.4 In the most recent year, what portion of the cash flow from operations was paid to
shareholders in the form of dividends?
Cash Flow from Operating Activities 2012: $107,217 (p.35, Dorel Annual Report 2012)
Dividends on Common Shares 2012: $28,449 (p.35, Dorel Annual Report 2012)
28,449
=0.27=27
107,217
Dorel paid 27% of its cash flow generated from operations in the form of dividends.
5.5 How much cash did the company pay for interest during the most recent year? How much
cash did it pay for income taxes? Where did you find these amounts? (Hint: recall that
interest expense and income tax expense are not necessarily equal to the cash payments for
interest and taxes, respectively).
These figures are in thousands of US dollars.
Interest paid in cash: $16,660
Cash paid for income taxes: $19,271
These amounts were found in the consolidated statement of Cash Flows in Dorels Annual
Report for 2012(p.35).
5.6 What is the effect of the change in trade receivables on cash flows from operations for the
most recent year (that is, did the change increase or decrease operating cash flows, and by
how much)? Explain you answer and identify the direction and amount of the change.
Units in Thousands of US dollars
2011: 403,664
2012: 443,020

(p.31, Dorels Annual Report 2012)

There was an increase of $39,356,000 in Trade Receivables from 2011 to 2012 which
means cash collected from customers is lower than revenue.

5.7

What is the effect of the change in inventories on cash flows from operations for the most
recent year (that is, did the change increase or decrease operating cash flows, and by how
much)? Explain your answer and identify the direction and amount of the change.
Inventories have increased from 442,409 in 2011 to 501,652 in 2012 (p.31, Dorels Annual
Report 2012). Dorels statement of financial position indicates that inventory increased by
59,243 which means that the cost of purchases is larger than the cost of merchandise sold.