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Chapter 5: Question 4FSAC (page 256)

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.

Short Answer

Expert verified
  1. Company cannot finance its expansion.
  2. Increase in current liabilities might be the reason for the increase in cash provided by operations.

Step by step solution

01

Definition of Internal Financing

The process under which the business entity finances its business expansion through the use of its profit and assets is known as internal financing.

02

Calculation of free cash flow

Particular

Current Year

Prior Year

Cash provided by operations

$6,842

$5,475

Less: Dividend paid

0

0

Less: capital expenditure

(4,893)

(3,444)

Free Cash Flow

$1,949

$2,031

The data presented above reflects that the company鈥檚 profitability is declining and an increase in cash from operations. The increase in cash from operation might be because of an increase in current liabilities

03

Implications of increase in cash provided by operations

The increase in cash from the operation is because of the following reason:

  1. Net increase in working capital.
  2. Non-cash income adjustment.
  3. Increase in current liabilities.

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Most popular questions from this chapter

EXCEL (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2017.

Goodwill

\(125,000

Accumulated depreciation - equipment

\)292,000

Payroll tax payable

177,591

Inventory

239,800

Bond payable

300,000

Rent payable (short-term)

45,000

Discount on bond payable

15,000

Income tax payable

98,362

Cash

360,000

Rent payable (long-term)

480,000

Land

480,000

Common stock, \(1 par value

200,000

Notes receivable

445,700

Preferred stock, \)10 par value

150,000

Note payable

265,000

Prepaid expenses

87,920

Account payable

490,000

Equipment

1,470,000

Retained earnings

Debt investment (trading)

121,000

Income tax receivable

97,630

Accumulated depreciation 鈥� building

270,200

Note payable (Long-term)

1,600,000

Buildings

1,640,000

Instructions

Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term unless stated otherwise. The cost and fair value of equity investments (trading) are the same.

Lowell Company鈥檚 December 31, 2017, trial balance includes the following accounts: Inventory \(120,000, Buildings \)207,000, Accumulated Depreciation鈥擡quipment \(19,000, Equipment \)190,000, Land (held for investment) \(46,000, Accumulated Depreciation鈥擝uildings \)45,000, Land \(71,000, and Timberland \)70,000. Prepare the property, plant, and equipment section of the balance sheet

Stowe Company鈥檚 December 31, 2017, trial balance includes the following accounts: Investment in Common Stock \(70,000, Retained Earnings \)114,000, Trademarks \(31,000, Preferred Stock \)152,000, Common Stock \(55,000, Deferred Income Taxes \)88,000, Paid-in Capital in Excess of Par鈥擟ommon Stock \(174,000, and Noncontrolling Interest \)63,000. Prepare the stockholders鈥� equity section of the balance sheet.

Keyser Beverage Company reported the following items in the most recent year.

Net income $40,000

Dividends paid 5,000

Increase in accounts receivable 10,000

Increase in accounts payable 7,000

Purchase of equipment (capital expenditure) 8,000

Depreciation expense 4,000

Issue of notes payable 20,000

Compute net cash provided by operating activities, the net change in cash during the year, and free cash flow.

P5-5 (L03) GROUPWORK (Balance Sheet Adjustment and Preparation) Presented below is the balance sheet of Sargent Corporation for the current year, 2017.

SARGENT CORPORATION

Balance Sheet

December 31, 2017

Current assets

\(485,000

Current liabilities

\)380,000

Investment

640,000

Long-term liabilities

1,000,000

Property, Plant, and Equipment

1,720,000

Stockholder鈥檚 equity

1,770,000

Intangible assets

305,000

\(3,150,000

\)3,150,000

The following information is presented.

1. The current assets section includes cash \(150,000, accounts receivable \)170,000 less \(10,000 for allowance for doubtful accounts, inventories \)180,000, and unearned rent revenue \(5,000. Inventory is stated on the lower-of-FIFO-cost-or-net realizable value.

2. The investments section includes the cash surrender value of a life insurance contract \)40,000; investments in common stock, short-term \(80,000 and long-term \)270,000; and bond sinking fund \(250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings \)1,040,000 less accumulated depreciation \(360,000, equipment \)450,000 less accumulated depreciation \(180,000, land \)500,000, and land held for future use \(270,000.

4. Intangible assets include a franchise \)165,000, goodwill \(100,000, and discount on bonds payable \)40,000.

5. Current liabilities include accounts payable \(140,000, notes payable鈥攕hort-term \)80,000 and long-term \(120,000, and income taxes payable \)40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2025.

7. Stockholders鈥� equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for \(450,000; and common stock, \)1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of \(10. In addition, the corporation has retained earnings of \)320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.
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