Ch3
Can a company have negative free cash flow?
Yes
Gives details about the firm's sales, costs, and profits for the past accounting period.
Income Statement
Provides details about the flow of funds from operating, investing, and financing activities.
Statement of Cash Flows
NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today's paper. In its annual report this year, NOW Inc. reported a net income of $192 million. Last year, the company reported a retained earnings balance of $442 million, whereas this year it increased to $520 million. How much was paid out in dividends this year? $575 million $270 million $3 million $114 million
$114 million $520 million - $442 million = $78 million $192 million - $78 million
During the last year, Globo-Chem Co. generated $702.00 million in cash flow from operating activities and had negative cash flow generated from investing activities (-384.00 million). At the end of the first year, Globo-Chem Co. had $120 million in cash on its balance sheet, and the firm had $380 million in cash at the end of the second year. What was the firm's cash flow (CF) due to financing activities in the second year? $72.50 million $-29.00 million $-58.00 million $43.50 million
$58 million $380 million - $120 million = $260 million $260 million = $702 million -$384 million + FA $702 million - $384 million - $260 million = $58 million
Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 • Your existing business generates $99,000 in EBIT.• The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $18,857. • You don't need to spend any money for new equipment in your existing cafés; however, you do need $14,850 of additional cash.• You also need to purchase $7,920 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. • It is also estimated that your accruals, including taxes and wages payable, will increase by $4,950. Based on your evaluation you have _________ in free cash flow.
$83,207 $99,000 - (1 x .25) = $74,250 $74,250 + $18,857 - ($14,850 - $4,950) = $83,207
Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance. Indicate which financial statement you would refer to when answering the questions in the following table: How profitable has the firm been?
Income Statement
A company records a loss of $70,000 on the sale of its outdated inventory.
Operating Activity
D and W Co. sells its last season's inventory to a discount store.
Operating Activity
Explains the changes in a company's stockholders' equity over the accounting year.
Statement of Stockholder's Equity
Accountants focus on creating financial statements, whereas finance professionals use these statements to evaluate a firm and answer questions about its performance. Indicate which financial statement you would refer to when answering the questions in the following table: How much of the firm's earnings are left as balance after the firm pays out dividends to its shareholders?
Statement of Stockholders' Equity
Which of the following statements best describes free cash flow? The amount of a firm's available cash that can be used without harming operations or the ability to produce future cash flows The amount of a firm's available cash used to write off capital expenditures and depreciation
The amount of a firm's available cash that can be used without harming operations or the ability to produce future cash flows
Is published once a year and provides stockholders with details about the company's performance and financial condition.
Annual Report
Has three segments that when analyzed together give an idea of what the company owns and what it owes.
Balance Sheet
Which of the following best describes shareholders' equity? Equity is the sum of shareholders' capital provided by shareholders and retained earnings. Equity is the difference between the company's assets and retained earnings.
Equity is the difference between the company's assets and retained earnings.
Yum Brands distributes dividends to its common stockholders for the first time.
Financing Activity
DigiInk Printing Co. buys new machinery to ramp up its production capacity.
Investing Activity
Which of the following is true for the statement of cash flows? It reflects revenues when earned. It reflects cash generated and used during the reporting period.
It reflects cash generated and used during the reporting period.
