3.23     PREPARING A STATEMENT OF CASH FLOWS FROM BALANCE SHEETS AND INCOME STATEMENTS. Fuso Pharmaceutical Industries develops, manufactures, and markets pharmaceutical products in Japan. Its main product is a solution used by individuals with artificial kidneys. Most individuals in Japan are covered by a national health insurance system. The Japanese government sets the policies for the propor- tion of health care costs covered by the government versus the proportion that is the respon- sibility of the individual. The government also establishes the prices for prescription drugs. The Japanese economy experienced recessionary conditions in recent years. In response to

 

these conditions, the Japanese government increased the proportion of medical costs that is the patient’s responsibility and lowered the prices for prescription drugs. Exhibit 3.30 pre- sents the firm’s balance sheets on March 31 of Year 1 to Year 4, and Exhibit 3.31 presents the firm’s income statements for the years ending March 31, Year 2 to Year 4.

 

 

March 31:	Year 4	Year 3	Year 2	Year 1
ASSETS	Â	Â	Â	Â
Cash	¥ 6,233	¥ 4,569	¥ 4,513	¥ 5,008
Accounts and notes receivable—Trade	19,003	17,828	19,703	19,457
Inventories	7,693	7,948	8,706	8,607
Deferred income taxes	1,355	1,192	948	824
Prepayments	432	325	640	634
Total Current Assets	¥34,716	¥31,862	¥34,510	¥34,530
Investments	3,309	2,356	3,204	4,997
Property, plant, and equipment, at cost	71,792	71,510	71,326	71,018
Less accumulated depreciation	(40,689)	(38,912)	(36,854)	(35,797)
Deferred income taxes	236	1,608	1,481	494
Other assets	4,551	3,904	3,312	3,463
Total Assets	¥73,915	¥72,328	¥76,979	¥78,705
LIABILITIES AND SHAREHOLDERS’ EQUITY	Â	Â	Â	Â
Accounts and notes payable—Trade	¥10,087	¥ 9,629	¥10,851	¥10,804
Notes payable to banks	10,360	10,328	9,779	10,023
Current portion of long-term debt	100	200	—	—
Other current liabilities	7,200	6,170	9,779	7,565
Total Current Liabilities	¥27,747	¥26,327	¥30,409	¥28,392
Long-term debt	8,140	7,889	6,487	8,147
Deferred income taxes	3,361	—	—	—
Employee retirement benefits	809	905	1,087	1,166
Other noncurrent liabilities	175	174	200	216
Total Liabilities	¥40,232	¥35,295	¥38,183	¥37,921
Common stock	¥10,758	¥10,758	¥10,758	¥10,758
Additional paid-in capital	15,012	15,012	15,012	15,012
Retained earnings	9,179	11,838	13,697	15,014
Accumulated other comprehensive income	(342)	(490)	(659)	—
Treasury stock	(924)	(85)	(12)	—
Total  Shareholders’ Equity	¥33,683	¥37,033	¥38,796	¥40,784
Total Liabilities and Shareholders’ Equity	¥73,915	¥72,328	¥76,979	¥78,705

                                                                            

 

 

Fuso Pharmaceutical Industries

Income Statements (amounts in millions) (Problem 3.23)

 

Year Ended March 31:	Year 4	Year 3	Year 2
Sales Cost of goods sold	¥41,352 (27,667)	¥41,926 (27,850)	¥44,226 (28,966)
Selling and administrative expenses	(13,396)	(15,243)	(15,283)
Interest expense	(338)	(364)	(368)
Income tax expense	(1,823)	443	34
Net Income	¥(1,872)	¥(1,088)	¥   (357)

 

 

 

Required

a.    Prepare a worksheet for the preparation of a statement of cash flows for Fuso Pharmaceutical Industries for each of the years ending March 31, Year 2 to Year 4. Follow the format of Exhibit 3.13 in the text. Notes to the financial statements indi- cate the following:

(1)  The changes in Accumulated Other Comprehensive Income relate to revalu- ations of Investments in Securities to market value. The remaining changes in Investments in Securities result from purchases and sales. Assume that the sales occurred at no gain or loss.

(2)  No sales of property, plant, and equipment took place during the three-year period.

(3)  The changes in Other Noncurrent Assets are investing activities.

(4)  The changes in Employee Retirement Benefits relate to provisions made for retirement benefits net of payments made to retired employees, both of which the statement of cash flows classifies as operating activities.

(5)  The changes in Other Noncurrent Liabilities are financing activities.

b.   Prepare a comparative statement of cash flows for Year 2, Year 3, and Year 4.

c.    Discuss the relation between net income and cash flow from operations and the pat- tern of cash flows from operating, investing, and financing transactions for Year 2, Year 3, and Year 4.