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Chapter 5: Q32Q. (page 238)
What is the profession鈥檚 recommendation in regard to the use of the term 鈥渟urplus鈥�? Explain.
Professionals recommend that business entities not use 鈥渟urplus鈥� in the balance sheet.
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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.
Presented below is a condensed version of the comparative balance sheets for Zubin Mehta Corporation for the last two years at December 31.
2017 | 2016 | |
Cash | \(177,000 | \)78,000 |
Accounts receivables | 180,000 | 185,000 |
Investment | 52,000 | 74,000 |
Equipment | 298,000 | 240,000 |
Accumulated depreciation | (106,000) | (89,000) |
Current liabilities | 134,000 | 151,000 |
Common stock | 160,000 | 160,000 |
Retained earnings | 307,000 | 177,000 |
Additional information:
Investments were sold at a loss of \(10,000; no equipment was sold; cash dividends paid were \)30,000; and net income was $160,000.
Instructions
(a) Prepare a statement of cash flows for 2017 for Zubin Mehta Corporation.
(b) Determine Zubin Mehta Corporation鈥檚 free cash flow.
(Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented below (000s omitted).
FONZARELLI CORPORATION | ||
BALANCE SHEET (PARTIAL) | ||
DECEMBER 31, 2018 | ||
Assets | ||
Cash | \(100,000 | |
Unclaimed payroll check | 27,500 | |
Debt investment (trading) (fair value \)30,000) at cost | 37,000 | |
Accounts receivables (less bad debt reserves) | 75,000 | |
Inventory鈥攁t lower-of-cost (determined by the next-in, first-out method) or net realizable value | 240,000 | |
Total current assets | 479,500 | |
Tangible assets | ||
Land (less accumulated depreciation) | 80,000 | |
Building and equipment | \(800,000 | |
Less: Accumulated depreciation | (250,000) | 550,000 |
Net tangible assets | 630,000 | |
Long-term investment | ||
Stock and bonds | 100,000 | |
Treasury stock | 70,000 | |
Total long-term investment | 170,000 | |
Other assets | ||
Discount on bonds payable | 19,400 | |
Sinking funds | 975,000 | |
Total other assets | 994,400 | |
Total assets | \)2,273,900 |
Instructions
Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation鈥檚 assets.
IFRS5-3 Briefly describe the convergence efforts related to financial statement presentation.
Discuss at least two situations in which estimates could affect the usefulness of the information in the balance sheet.
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