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Q28Q.

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Intermediate Accounting (Kieso)
Found in: Page 238

Short Answer

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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Step by Step Solution

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 lifeblood because a business entity cannot survive without sufficient working capital.

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.

Most popular questions for Business-studies Textbooks

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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