ACC410 Advanced Financial Accounting

The list of five items that were added or subtracted from net income to calculate cashflow from operating activities along with its reason for addition or subtraction are listed below:

1. Depreciation of revenue earning equipment – Depreciation of an equipment is generally a non-cash item of expenses, because it is usually an ongoing charge on the carrying amount of the asset. Operating cashflow begins with net profit but since the income statement is prepared using accrual concept of accounting it may include some expenses that may not be incurred in actual, it is due to this reason non-cash items like depreciation are added back.
2. Depreciation of property and equipment- same reason is applicable for depreciation on property plant and equipment, this do not have direct impact on the cashflows generated by the company (1). The net profit of Hertz global holdings includes depreciation expense which is a non-cash items thus it must be added back (2).
3. Amortization of other intangible assets- this is also a non-cash item similar to depreciation which is treated as an expense while calculating net profit of the company. Thus, amortization expense of intangible asset must be added back.
4. Stock-based compensation charges-Similar to depreciation and amortization expenses of intangible asset, Stock-based compensation charges is also a non-cash expenses, which is added back to profit to improve the operating cashflows which is actually not paid in cash.
5. Gain on sale of property and equipment- since a gain on sale of asset is a non-cash event it gets deducted from the net income while calculating cashflows from operating activities (3).

Answer 2

The receivable of Hertz global holdings Inc had increased from the year 2011 to 2012. This is reflected in the cashflow from operating activities of the entity.

The accrued liability of Hertz global holdings Inc had decreased from the year 2011 to 2012. This is shown as changes in operating assets and liabilities of the company while calculating consolidated cashflow from operating activities.

Answer 3

Hertz global holdings Inc have paid $ 2232290 to its investors for repurchasing its shares and paying dividend during the year 2012.

Answer 4

The largest asset reported in Hertz balance sheet is non-current asset of the company amounting to $ 19718705. We have considered the largest value of asset as non-current asset despite the fact that only total asset of the company is reflected in the balance sheet of the company because the revenue earning equipment values, property plant and equipment values, value of other intangible assets net and goodwill of the company together form non-current asset of the company which is larger than the current assets value of the company comprising of remaining assets.

Answer 5

1. The largest cash outflow (inflow) related to rental car acquisition (disposal) is shown under cashflow from investing activities of the company.
2. All the cashflows related to obtaining rental product of the said company is shown under cashflow from operating activities as changes in asset and liabilities.
3. No Hertz had wrongly reported the acquisition and disposal of rental cars under cashflows from investing activity, it must be reported under cashflow from operating activities as changes in asset and liabilities of the company.

Answer 6

If we consider the two accounting issues then the operating cashflows of 2012 will get increase after adding the underestimated depreciation value and amount of decrease in receivable value after considering underestimated figures of bad debt expenses.

Answer 7

The book value of the asset sold by Hertz during the year amounts to $7125096+$137694-$8309=$7254481.

Answer 8

If Hertz had leased the cars under operating lease, then all the lease expense must be reported under operating cash flows of the company. It should not be treated as an asset of the company instead recorded as an expense (4)

Reference

1. com. How Does Depreciation Affect Cash Flow? [Internet]. Gocardless.com. 2022 [cited 12 January 2022]. Available from: 
2. Bragg S, Bragg S. How depreciation affects cash flow — AccountingTools [Internet]. AccountingTools. 2022 [cited 12 January 2022]. Available from: https://www.accountingtools.com/articles/how-does-depreciation-affect-cash-flow.html
3. Atrill P, McLaney EJ. Financial accounting for decision makers. Pearson Education; 2008.
4. Small Business - Chron.com. How to Account for a Lease Liability on a Cash Flow Statement [Internet]. Small Business - Chron.com. 2022 [cited 12 January 2022]. Available from: https://smallbusiness.chron.com/account-lease-liability-cash-flow-statement-44285.html