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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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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.)
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. |
Aero Inc. had the following balance sheet at December 31, 2016.
LANSBURY INC. | |||
BALANCE SHEET | |||
DECEMBER 31, 2016 | |||
Cash | \(20,000 | Account payable | \)30,000 |
Accounts receivables | 21,200 | Bond payable | 41,000 |
Investment | 32,000 | Common stock | 100,000 |
Plant assets (net) | 81,000 | Retained earnings | 23,200 |
Land | 40,000 | ||
\(194,200 | \)194,200 |
During 2017, the following occurred.
1. Aero liquidated its available-for-sale debt investment portfolio at a loss of \(5,000.
2. A tract of land was purchased for \)38,000.
3. An additional \(30,000 in common stock was issued at par.
4. Dividends totaling \)10,000 were declared and paid to stockholders.
5. Net income for 2017 was \(35,000, including \)12,000 in depreciation expense.
6. Land was purchased through the issuance of \(30,000 in additional bonds.
7. At December 31, 2017, Cash was \)70,200, Accounts Receivable was \(42,000, and Accounts Payable was \)40,000.
Instructions
(a) Prepare a statement of cash flows for the year 2017 for Aero.
(b) Prepare the unclassified balance sheet as it would appear at December 31, 2017.
(c) Compute Aero’s free cash flow and current cash debt coverage for 2017.
(d) Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements.
The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2017 appear below.
MADRASAH CORPORATION | |||
BALANCE SHEETS | |||
Assets | Dec 31, 2017 | Jan 1, 2017 | Inc./Dec. |
Cash | \(20,000 | \)13,000 | \(7,000 Inc. |
Accounts receivable | 106,000 | 88,000 | 18,000 Inc. |
Equipment | 39,000 | 22,000 | 17,000 Inc. |
Less: Accumulated depreciation – Equipment | 17,000 | 11,000 | 6,000 Inc. |
Total | \)148,000 | \(112,000 | |
Liabilities and Stockholder’s equity | |||
Account payable | \)20,000 | \(15,000 | 5,000 Inc. |
Common stock | 100,000 | 80,000 | 20,000 Inc. |
Retained earnings | 28,000 | 17,000 | 11,000 Inc. |
Total | \)148,000 | \(112,000 |
Net income of \)44,000 was reported, and dividends of $33,000 were paid in 2017. New equipment was purchased and none was sold.
Instructions
(a) Prepare a statement of cash flows for the year 2017.
(b) Compute the current ratio (current assets ÷ current liabilities) as of January 1, 2017, and December 31, 2017, and compute free cash flow for the year 2017.
(c) In light of the analysis in (b), comment on Madrasah’s liquidity and financial flexibility.
The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.
ALLESSANDRO SCARLATTI COMPANY | ||||
BALANCE SHEET PARTIAL | ||||
December 31, 2017 | ||||
Cash | \(40,000 | Account payable | \)61,000 | |
Accounts receivables | \(89,000 | Note payable | 67,000 | |
Less: Allowance for doubtful accounts | (7,000) | 82,000 | \)128,000 | |
Inventory | 171,000 | |||
Prepaid expenses | 9,000 | |||
\(302,000 |
The following errors in the corporation’s accounting have been discovered:
1. January 2018 cash disbursements entered as of December 2017 included payments of accounts payable in the amount of \)39,000, on which a cash discount of 2% was taken.
2. The inventory included \(27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, \)12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
3. Sales for the first four days in January 2018 in the amount of \(30,000 were entered in the sales journal as of December 31, 2017. Of these, \)21,500 were sales on account and the remainder were cash sales.
4. Cash, not including cash sales, collected in January 2018 and entered as of December 31, 2017, totaled \(35,324. Of this amount, \)23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan.
Instructions
(a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.)
(b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.
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