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Chapter 5: 3 (page 237)

A recent financial magazine indicated that the airline industry has poor financial flexibility. What is meant by financial flexibility, and why is it important?

Short Answer

Expert verified

Financial flexibility can be defined as meeting uncertainties by maintaining the amount and timing of cash flows. Financial flexibility reduces the risk associated with the business entity.

Step by step solution

01

Meaning of Financial Planner

A financial planner is an individual who helps a business entity or personal individual maintain their cash flow. Cash flow is maintained so that the business entity can meet any unforeseen situation.

02

Financial Flexibility

Financial flexibility can be defined as the business entity's ability to maintain the time and amount of cash flow to meet the uncertainties.

03

Importance of financial flexibility

Financial flexibility is important for the business entity because it lowers the risk of the business entity. It reduces the risk of failure of the business entity.

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Most popular questions from this chapter

What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense.

(b) property, plant, and equipment.

(c) an intangible asset.

(d) a long-term investment.

What are some of the techniques of disclosure for the balance sheet?

E5-10 (L02,3) (Current Liabilities) Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.

(a) On December 20, 2017, a former employee filed a legal action against Baylor for \(100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.

(b) Bonuses to key employees based on net income for 2017 are estimated to be \)150,000.

(c) On December 1, 2017, the company borrowed \(600,000 at 8% per year. Interest is paid quarterly.

(d) Accounts receivable at December 31, 2017, is \)10,000,000. An aging analysis indicates that Baylor’s expense provision for doubtful accounts is estimated to be 3% of the receivables balance.

(e) On December 15, 2017, the company declared a \(2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2018.

(f) During the year, customer advances of \)160,000 were received; $50,000 of this amount was earned by December 31, 2017.

Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.

E5-12 (L03) (Preparation of a Balance Sheet) Presented below is the trial balance of Scott Butler Corporation at December 31, 2017.

Particular

Debit

Credit

Cash

\(197,000

Sales Revenue

\)8,100,000

Debt investment (trading) (at cost \(145,000)

153,000

Cost of goods sold

4,800,000

Debt investment (long-term)

299,000

Equity Investment (long-term)

277,000

Notes payable (Short-term)

90,000

Account payable

455,000

Selling expenses

2,000,000

Investment revenue

63,000

Land

260,000

Buildings

1,040,000

Dividend payable

136,000

Accrued Liabilities

96,000

Accounts Receivable

435,000

Accumulated depreciation – Building

152,000

Allowance for doubtful accounts

25,000

Administrative expenses

900,000

Interest expenses

211,000

Inventory

597,000

Gain

80,000

Notes payable

900,000

Equipment

600,000

Bonds payable

1,000,000

Accumulated depreciation – Equipment

60,000

Franchises

160,000

Common stock

1,000,000

Treasury stock

191,000

Patents

195,000

Retained Earnings

78,000

Paid-in-capital in excess of par

80,0000

Total

\)12,315,000

$12,315,000

Instructions Prepare a balance sheet at December 31, 2017, for Scott Butler Corporation. (Ignore income taxes.)
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