Explain this apparent contradiction between the loss and the positive cash flows.
Answer:
There were net additions to the net loss reported on the income statement to convert the net loss from the accrual basis to the cash basis. For example, depreciation is an expense in determining net income, but it does not result in a cash outflow. Thus, depreciation is added back to the net loss in order to determine net cash flow from operations. A second large item that is added to the net loss is the increase in air traffic liability of $225 million. This represents an increase in unused, but paid, tickets (unearned revenue) between the two balance sheet dates. This is a significant item that is largely unique to the airline industry.
The cash flows from operating activities detail is provided as follows for class discussion:
CONTINENTAL AIRLINES, INC.
Cash Flows from Operating Activities
(Selected from Statement of Cash Flows)
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (471)
Adjustments to reconcile net income (loss) to net cash flow
provided by operating activities:
Depreciation and amortization 1,093
Special charges 279
Gain on disposition of investments —
Undistributed equity in the income of other companies —
Other, net (45)
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable 29
Decrease (increase) in spare parts and supplies (81)
Decrease (increase) in prepaid expenses 87
Increase (decrease) in accounts payable (19)
Increase (decrease) in air traffic liability 225
Increase (decrease) in other liabilities 144
Net cash flows from (used for) operating activities $1,241