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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

(Classification of Balance Sheet Accounts) Presented below are the captions of Faulk Company’s balance sheet.

(a) Current assets

(f) Current liabilities

(b) Investments

(g) Noncurrent liabilities

(c) Property, plant, and equipment

(h) Capital stock

(d) Intangible assets

(i) Additional paid-in capital

(e) Other assets

(j) Retained earnings

Instructions

Indicate by letter where each of the following items would be classified.

1. Preferred stock

11. Cash surrender value of life insurance

2. Goodwill

12. Note payable

3. Salaries and wages payable

13. Supplies

4. Account payable

14. Common stock

5. Building

15. Land

6. Equity investment (trading)

16. Bond sinking fund

7. Current maturity of long-term debt

17. Inventory

8. Premium on bond payable

18. Prepaid insurance

9. Allowance for doubtful accounts

19. Bond payable

10. Accounts receivable

20. Income tax payable

(L02,3) (Balance Sheet Classifications) Presented below are a number of balance sheet accounts of Deep Blue Something, Inc.

(a) Debt Investments.

(h)Interest Payable.

(b) Treasury Stock.

(i) Deficit.

(c) Common Stock.

(j) Equity Investments(ownership stake of less than 20%).

(d) Dividends Payable.

(k) Income Taxes Payable.

(e) Accumulated Depreciation—Equipment.

(l) Unearned Subscriptionsrevenue.

(f) Construction in Process.

(m) Work in Process.

(g) Petty Cash.

(n) Salaries and WagesPayable.

Instructions For each of the accounts above, indicate the proper balance sheet classification. In the case of borderline items, indicate the additional information that would be required to determine the proper classification.

Hawthorn Corporation’s adjusted trial balance contained the following accounts at December 31, 2017: Retained Earnings \(120,000, Common Stock \)750,000, Bonds Payable \(100,000, Paid-in Capital in Excess of Par—Common Stock \)200,000, Goodwill \(55,000, Accumulated Other Comprehensive Loss \)150,000, and Noncontrolling Interest $35,000. Prepare the stockholders’ equity section of the balance sheet.

(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.

Particular

Amount \(

Property, Plant, and Equipment (net of depreciation)

\)10,000,000

Rather than

Particular

Amount \(

Property, Plant, and Equipment

\)50,000,000

Less: Accumulated depreciation

(40,000,000)

Net book value

$10,000,000

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

(b) What should Keene do?

A comparative balance sheet for Shabbona Corporation is presented below.

Particular

December 31

2017

2016

Assets

Cash

\(73,000

\)22,000

Accounts receivable

82,000

66,000

Inventory

180,000

189,000

Land

71,000

110,000

Equipment

260,000

200,000

Accumulated depreciation – Equipment

(69,000)

(42,000)

Total

\(597,000

\)545,000

Liabilities and stockholder’s equity

Account payable

\(34,000

\)47,000

Bonds payable

150,000

200,000

Common stock (\(1 par)

214,000

164,000

Retained earnings

199,000

134,000

Total

\)597,000

\(545,000

Additional information:

1. Net income for 2017 was \)125,000. No gains or losses were recorded in 2017.

2. Cash dividends of \(60,000 were declared and paid.

3. Bonds payable amounting to \)50,000 were retired through issuance of common stock.

Instructions

(a) Prepare a statement of cash flows for 2017 for Shabbona Corporation.

(b) Determine Shabbona Corporation’s current cash debt coverage, cash debt coverage, and free cash flow. Comment on its liquidity and financial flexibility.
See all solutions

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