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Chapter 5: Q28Q. (page 238)
What is the purpose of a free cash flow analysis?
Free cash flow is calculated with the primary purpose of depicting the availability of cash to purchase more fixed assets or investments.
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(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present 鈥淧roperty, plant, and equipment鈥� in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company鈥檚 plant assets are rather old. She feels that she can disclose one figure titled 鈥淧roperty, plant, and equipment, net of depreciation,鈥� and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.
Particular | Amount \( |
Property, Plant, and Equipment (net of depreciation) | \)10,000,000 |
Rather than
Particular | Amount \( |
Property, Plant, and Equipment | \)50,000,000 |
Less: Accumulated depreciation | (40,000,000) |
Net book value | $10,000,000 |
Instructions
Answer the following questions.
(a) What are the ethical issues involved?
(b) What should Keene do?
What is a 鈥淪ummary of Significant Accounting Policies鈥�?
(Classification of Balance Sheet Accounts) Presented below are the captions of Faulk Company鈥檚 balance sheet.
(a) Current assets | (f) Current liabilities |
(b) Investments | (g) Noncurrent liabilities |
(c) Property, plant, and equipment | (h) Capital stock |
(d) Intangible assets | (i) Additional paid-in capital |
(e) Other assets | (j) Retained earnings |
Instructions
Indicate by letter where each of the following items would be classified.
1. Preferred stock | 11. Cash surrender value of life insurance |
2. Goodwill | 12. Note payable |
3. Salaries and wages payable | 13. Supplies |
4. Account payable | 14. Common stock |
5. Building | 15. Land |
6. Equity investment (trading) | 16. Bond sinking fund |
7. Current maturity of long-term debt | 17. Inventory |
8. Premium on bond payable | 18. Prepaid insurance |
9. Allowance for doubtful accounts | 19. Bond payable |
10. Accounts receivable | 20. Income tax payable |
Question: P5-1 (L03) (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order.
Accounts Receivable Inventory鈥擡nding
Accumulated Depreciation鈥擝uildings Land
Accumulated Depreciation鈥擡quipment Land for Future Plant Site
Accumulated Other Comprehensive Income Loss from Flood
Advances to Employees Noncontrolling Interest
Advertising Expense Notes Payable (due next year)
Allowance for Doubtful Accounts Paid-in Capital in Excess of Par鈥� preferred stock
Bond Sinking Fund Patents
Bonds Payable Payroll Taxes Payable
Buildings Pension Liability
Cash (in bank) Petty Cash
Cash (on hand) Preferred Stock
Cash Surrender Value of Life Insurance Premium on Bonds Payable
Commission Expense Prepaid Rent
Common Stock Purchase Returns and Allowances
Copyrights Purchases
Debt Investments (trading) Retained Earnings
Dividends Payable Salaries and Wages Expense (sales)
Equipment Salaries and Wages Payable
Freight-In Sales Discounts
Gain on Disposal of Equipment Sales Revenue
Interest Receivable Treasury Stock (at cost)
Inventory鈥擝eginning Unearned Subscriptions Revenue
Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)
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.
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