Learning Materials
Features
Discover
Chapter 5: 2 (page 237)
What is meant by solvency? What information in the balance sheet can be used to assess a company鈥檚 solvency?
Solvency reflects the ability to repay the borrowed money. It can be determined using the liabilities and the assets classified as current in nature.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
Case 4: Amazon.com The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon鈥檚 stock price has soared to amazing levels. However, it is often pointed out in the financial press that it took the company several years to report its first profit. The following financial information is taken from a recent annual report.
(\( in millions) | Current year | Prior year |
Current assets | \)31,327 | $24,625 |
Total assets | 54,505 | 40,159 |
Current liabilities | 28,089 | 22,980 |
Total liabilities | 43,764 | 30,413 |
Cash provided by operations | 6,842 | 5,475 |
Capital expenditures | 4,893 | 3,444 |
Dividend paid | 0 | 0 |
Net income (loss) | (241) | 274 |
Sales | 88,988 | 74,452 |
Instructions
(a) Calculate free cash flow for Amazon for the current and prior years, and discuss its ability to finance expansion from internally generated cash. Thus far Amazon has avoided purchasing large warehouses. Instead, it has used those of others. It is possible, however, that in order to increase customer satisfaction, the company may have to build its own warehouses. If this happens, how might your impression of its ability to finance expansion change?
(b) Discuss any potential implications of the change in Amazon鈥檚 cash provided by operations from the prior year to the current year.
Net income for the year for Carrie, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. What might account for the difference?
BE5-2 (L03) Koch Corporation鈥檚 adjusted trial balance contained the following asset accounts at December 31, 2017: Cash \(7,000, Land \)40,000, Patents \(12,500, Accounts Receivable \)90,000, Prepaid Insurance \(5,200, Inventory \)30,000, Allowance for Doubtful Accounts \(4,000, and Equity Investments (trading) \)11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
Presented below is the balance sheet for Tomkins plc, a British company.
Tomkins plc Consolidated Balance Sheet (amounts in 拢 million)
Particular | Amount 拢 |
Non-Current Assets | |
Goodwill | 436 |
Other tangible assets | 78 |
Property, plant, and equipment | 1,122.80 |
Investment in associates | 20.6 |
Trade and other receivables | 81.1 |
Deferred tax assets | 82.9 |
Post-employment benefits surpluses | 1.3 |
1,822.7 | |
Current assets | |
Inventories | 590.8 |
Trade and other receivables | 753 |
Income tax recoverable | 49 |
Available for sale investment | 1.2 |
Cash and Cash equivalents | 445 |
1,839 | |
Assets held for sale | 11.9 |
Total assets | 3,673.6 |
| |
Current liabilities | |
Bank overdraft | 4.8 |
Bank and other loans | 11.2 |
Obligations under finance leases | 1 |
Trade and other payables | 677.6 |
Income tax liabilities | 15.2 |
Provisions | 100.3 |
810.1 | |
Non-Current liabilities | |
Bank and other loans | 687.3 |
Obligations under financial leases | 3.6 |
Trade and other payables | 27.1 |
Post-Employment benefits obligations | 343.5 |
Deferred tax liabilities | 25.3 |
Income tax liabilities | 79.5 |
Provisions | 19.2 |
1,185.5 | |
Total liabilities | 1,995.6 |
Net assets | 1,678 |
Capital reserve | |
Ordinary share capital | 79.6 |
Share premium account | 799.2 |
Own shares | (8.2) |
Capital redemption reserve | 921.8 |
Currency translation reserve | (93) |
Available for sale reserve | (0.9) |
Accumulated deficit | (161.9) |
Shareholder鈥檚 equity | 1,536.6 |
Minority interest | 141.4 |
Total equity | 1,678 |
Instructions
(a) Identify at least three differences in balance sheet reporting between British and U.S. firms, as shown in Tomkins鈥� balance sheet.
(b) Review Tomkins鈥� balance sheet and identify how the format of this financial statement provides useful information, as illustrated in the chapter.
The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine