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Chapter 5: Q28Q. (page 238)

What is the purpose of a free cash flow analysis?

Short Answer

Expert verified

Free cash flow is calculated with the primary purpose of depicting the availability of cash to purchase more fixed assets or investments.

Step by step solution

01

Definition of Working Capital

The capital available with the business for financing the daily operations is known as working capital.It is known as the company’s lifebloodbecause a business entity cannot survive without sufficient working capital.

02

Purpose of Free Cash Flow

Free cash flow analysis is done to determine the amount of cash available with the business entity for purchasing investments and retiring its securities, either debt or equity, or to determine the money available with the business that can increase its liquidity and financial flexibility.

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Most popular questions from this chapter

BE5-5 (L03) Crane Corporation has the following accounts included in its December 31, 2017, trial balance: Equity Investments (trading) \(21,000, Goodwill \)150,000, Prepaid Insurance \(12,000, Patents \)220,000, and Franchises $130,000. Prepare the intangible assets section of the balance sheet.

Crane Corporation has the following accounts included in its December 31, 2017, trial balance: Equity Investments (trading) \(21,000, Goodwill \)150,000, Prepaid Insurance \(12,000, Patents \)220,000, and Franchises $130,000. Prepare the intangible assets section of the balance sheet.

What are the major limitations of the balance sheet as a source of information?

IFRS5-2 Briefly describe some of the similarities and differences between GAAP and IFRS with respect to statement of financial position (balance sheet) reporting.

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:

1. Operating activity—add to net income.

2. Operating activity—deduct from net income.

3. Investing activity.

4. Financing activity.

5. Reported as significant noncash activity.

The transactions are as follows.

(a) Issuance of common stock.

(h) Payment of cash dividends.

(b) Purchase of land and building.

(i) Exchange of furniture for office equipment.

(c) Redemption of bonds

(j) Purchase of treasury stock.

(d) Sale of equipment.

(k) Loss on sale of equipment.

(e) Depreciation of machinery.

(l) Increase in accounts receivable during the year.

(f) Amortization of patent.

(m) Decrease in accounts payable during the year.

(g) Issuance of bonds for plant assets.
See all solutions

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