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Following the acquisition of Kraft during Year 8, the Philip Morris Companies released its Year 8 statement of cash flows (indirect method).

PHILIP MORRIS COMPANIES, INC.

Statement of Cash Flows

For the Year Ended December 31, Year 8 ($ millions)

Cash flows from operating activities

Net income............................................................. $ 2,337

Add (deduct) adjustments to cash basis

Depreciation expense........................................ 654

Amortization of goodwill.................................... 125

Decrease in accounts receivable....................... 601

Decrease in inventories..................................... 2

Decrease in deferred taxes................................ (325)

Increase in accounts payable............................ 408

Increase in accrued liabilities............................ 1,041

Increase in income taxes payable...................... 362

Net cash flow from operating activities................. $ 5,205

Cash flows from investing activities

Increase in property, plant & equipment

(before depreciation)........................................... (980)

Increase in goodwill (before amortization)............. (783)

Decrease in investments....................................... 405

Acquisition of subsidiaryKraft *......................... (11,383)

Net cash used by investing activities.................... (12,741)

Cash flows from financing activities

Decrease in shortterm debt................................. (881)

Increase in longterm debt.................................... 9,929

Decrease in equity (repurchase) **........................ (540)

Dividends declared............................................... (941)

Increase in dividends payable............................... 47

Net cash provided by financing activities.............. 7,614

Net increase in cash............................................. $ 78

Instructions

Compute Philip Morriss free cash flow for Year 8. Discuss how free cash flow impacts the companys future earnings and financial condition.

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