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STATEMENT OF CASH FLOWS:  REPORTING THE EFFECTS OF OPERATING, INVESTING, AND FINANCING ACTIVITIES ON CASH FLOWS   T4-X

4.20 continued.

b.Interpreting cash flow from operations for a marketing services firm requires a comparison of the change in accounts receivable from clients and accounts payable to various media.  Marketing services firms act as agents between these two constituents.  In Year 3 and Year 4, the increase in accounts payable slightly exceeded the increase in accounts receivable, indicating that Omnicom Group used the media to finance its accounts receivable.  In Year 5, however, accounts payable did not increase nearly as much as accounts receivable.  It is unclear whether the media demanded earlier payment, whether the media offered incentives to pay more quickly, or some other reason.  As a consequence, cash flow from operations decreased in Year 5.  Cash flow from operations continually exceeds expenditures on property, plant, and equipment.  This relation is not surprising, given that marketing services firms are not capital intensive.  Omnicom Group invested significantly in other entities during the three years.  The classification of these investments as noncurrent suggests that they were not made with temporarily excess cash but as a more permanent investment.  Cash flow from operations was not sufficient to finance both capital expenditures and these investments.  The firm relied on long-term debt to finance the difference.  Given the marketing service firms are labor-intensive, one might question the use of debt instead of equity financing for these investments.  In fact, Omnicom Group repurchased share of its common stock in Year 4 and Year 5.  Thus, the capital structure of the firm became more risky during the three years.

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