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Chapter 5: Q3Q (page 237)

Question: 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

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Answer

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 its cash flow. Cash flow is maintained so 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 essential for the business entity because it lowers the risk to the business entity. It reduces the risk of failure of the business entity.

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Most popular questions from this chapter

Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as \(90,000.

(a) Accounts receivable increased from \)34,000 to \(39,000 from the beginning to the end of the year.

(b) During the year, 10,000 shares of preferred stock with a par value of \)100 per share were issued at \(115 per share.

(c) Depreciation expense amounted to \)14,000, and bond premium amortization amounted to \(5,000.

(d) Land increased from \)10,000 to $30,000.

The New York Knicks, Inc. sold 10,000 season tickets at $2,000 each. By December 31, 2017, 16 of the 40 home games had been played. What amount should be reported as a current liability at December 31, 2017?

Ames Company reported 2017 net income of \(151,000. During 2017, accounts receivable increased by \)13,000 and accounts payable increased by \(9,500. Depreciation expense was \)44,000. Prepare the cash flows from operating activities section of the statement of cash flows.

Patrick Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2017: Prepaid Rent \(12,000, Goodwill \)50,000, Franchise Fees Receivable \(2,000, Franchises \)47,000, Patents \(33,000, and Trademarks \)10,000. Prepare the intangible assets section of the balance sheet.

(Reporting the Financial Effects of Varied Transactions) In an examination of Arenes Corporation as of 31 Dec, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items.

1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of 1 Jan, 2017.

2. An additional assessment of 2016 income taxes was levied and paid in 2017.

3. When calculating the accrual for officers’ salaries at 31 Dec, 2017, it was discovered that the accrual for officers’ salaries for 31 Dec, 2016, had been overstated.

4. On 15 Dec, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable 1 Feb, 2018, to the common stockholders of record 31 Dec, 2017.

Instructions

Describe fully how each of the items above should be reported in the financial statements of Arenes Corporation for the year 2017.
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