Reorganizing the Accounting Statements: In Practice  231
also can affect the change in accounts. For example, companies translate for-
eign balance sheets into their home currencies, so changes in accounts will 
capture both true investments (which involve cash) and currency-based re-
statements (which are merely accounting adjustments and not the flow of cash 
into or out of the company). If a particular account is a significant part of cash 
flow, use the cash flow statement and notes from the annual report to better 
understand the year-to-year change in the account.
Exhibit 11.14 deconstructs the change in property, plant, and equipment 
for Costco. Capital expenditures and asset dispositions are reported in the 
accountant’s cash flow statement. To estimate deprecation, start with depre-
ciation and amortization from the cash flow statement and, if amortization of 
acquired intangibles exists, subtract it (it is often found in the note on goodwill 
and intangible assets). The remaining line items are found in the management 
discussion and analysis, or when not disclosed, they have been estimated.
It is not always possible to eliminate the currency effects for each line 
item on the balance sheet. If this is the case, adjust aggregate free cash 
flow for currency effects using the balance sheet account titled foreign-
currency translation, which under U.S. GAAP and IFRS is found within 
the statement of accumulated other comprehensive income. Unfortunately, 
the balance sheet account reports the aggregate effect across all foreign as-
sets and liabilities, not just operating items. If you believe most currency 
adjustments are related to operating items, add the increase in the cur-
rency translation account to determine free cash flow. Consider the situa-
tion where inventory is rising on the balance sheet due to currency changes 
and not investment. To balance the balance sheet, the company increases 
the currency translation account within equity. Since the increase in in-
ventory overstates actual investment in inventory, adding the increase in 
foreign-currency translation back to free cash flow undoes the negative 
cash flow caused by currency translation. For Costco, since we adjusted 
critical accounts one by one, we classify the unexplained currency transla-
tions as nonoperating.
EXHIBIT 11.14  Costco: Changes in Property, Plant, and Equipment
$ million
2015
2016
2017
2018
2019
Property, plant, and equipment, beginning of year
14,830
15,401
17,043
18,161
19,681
Capital expenditures1
2,393
2,649
2,502
2,969
2,998
Depreciation1
(1,127)
(1,255)
(1,370)
(1,437)
(1,492)
Currency and unexplained changes2
(695)
248
(14)
(12)
(297)
Property, plant, and equipment, end of year
15,401
17,043
18,161
19,681
20,890
1 Reported in the statement of cash flows.
2 Calculated as the unexplained difference between beginning and end of year.

232  Reorganizing the Financial Statements 
Cash Flow Available to Investors
Although not included in free cash flow, cash flows related to nonoperating 
assets are valuable in their own right. They must be evaluated and valued 
separately and then added to free cash flow to give the total cash flow avail-
able to investors:
Present Value
of Company’s
Free Cash Flow
Value of
Nonoperati
+
ng
Assets
Total Value
of
Enterprise
=
To reconcile free cash flow with total cash flow available to investors, in-
clude the following nonoperating cash flows:
• Nonoperating income and expenses. Unless you can net the account against 
a change in a corresponding asset or liability (because it is noncash), 
include nonoperating income and expenses in total cash flow available 
to investors, not in free cash flow.
• Nonoperating taxes. Include nonoperating taxes in total cash flow available 
to investors. Nonoperating taxes include tax shields on nonoperating items 
and other nonoperating taxes disclosed in the tax reconciliation table.
• Cash flow related to excess cash and marketable securities. Subtract the in-
crease (or add the decrease) in excess cash and marketable securities to 
compute total cash flow available to investors. If the company reports 
unrecognized gains and losses related to marketable securities in its 
statement of other comprehensive income, net the gain or loss against 
the change computed previously.
• Cash flow from other nonoperating assets. Repeat the process used for ex-
cess cash and marketable securities for other nonoperating assets. When 
possible, combine nonoperating gains and losses from a particular asset 
with changes in that nonoperating asset.
Reconciling Cash Flow Available to Investors
Cash flow available to investors should be identical to the company’s total 
financing flow. By modeling cash flow to and from investors, you will catch 
mistakes otherwise missed. Financial flows include flows related to debt, debt 
equivalents, and equity:
• Interest expenses. Interest from both traditional debt and operating leases 
should be treated as a financing flow.
• Debt issues and repayments. The change in debt represents the net borrow-
ing or repayment on all the company’s interest-bearing debt, including