Opener-in-Review
The chapter opener described a company that reported increases in revenues and profits, but even so, the company’s
To discuss: Reason for why a profitable growing business may have a negative free cash flow.
Introduction:
Cash flow is the inflow and outflow of cash and capital in a business where, a positive cash flow implies rise in the liquid assets, return on capital to the shareholders and more whereas a negative cash flow includes decreasing in the firm’s liquid assets.
The free cash flow indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments.
Explanation of Solution
The free cash flow (FCF) indicates whether the company has adequate cash flow to cover both the operating as well as the fixed and current assets investments as it represents the cash available to investors, creditors or equity owners after all these needs are met.
A firm may have to make additional investments in inventory, fixed assets, receivables etc. when it is expanding and such investments may not be necessarily show up immediatley in the profit calculation eventhough they reduce free cash flow.
When a company needs to make important investment into fixed or working capital higher than operating cash flow; then the firm may be generating high revenue and profit but may not be sufficient to pay creditors or owners. Thus the negative free cash flow may occur when the business is in an expansion phase where high investments is required in fixed asset and current assets to meet the growth requirements.
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Chapter 4 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
- short answer Some companies go out of business due to lack of cash flow. Even if they may have a lot of assets and minimal debt, without cash these companies cannot continue to operate. So the question is, if a company's net worth and net income are both positive, under what circumstances might it go out of business because of lack of cash flow?arrow_forwardCan a company have a high net income but not enough cash to pay its bills? Explain your response. Give me one scenario or example to support your response.arrow_forward3 While preparing the statement of financial performance, the directors of a company exaggerate profit figure than its actual figure to show colorful picture of the entity. This act of the director is termed as_____________ a. All the options b. Table dressing c. Door dressing d. Window dressingarrow_forward
- 2. The quality of a company's earnings is suspect when the company's net income is more than the cash flow from which activities? a. Operating b. Investing c. Financing d. Directingarrow_forwardA firm's new president wants to strengthen the company's financial position. Which of the following actions would make the company financially stronger? O a. Increase notes payable while holding sales constant. O b. Increase accounts receivable while holding sales constant. O c. Increase accounts payable while holding sales constant. O d. Increase inventories while holding sales constant. Oe. Increase EBIT while holding sales and assets constant.arrow_forwardWhich of the following is not correct about the negative cash flows? a. You cannot cover your expenses from sales alone O b. When your business has more outgoing than incoming money O C. You do have cash on hand to cover expenses O d. You can't sustain a business with long-term negative cash flowarrow_forward
- Which of the following is true about a firm with products in the decline stage of their lifecycle? A. We expect financing activities to be positive to cash as the product sales continue to be greater than the costs. B. We expect to see the cash from operations turn negative in this phase. C. We expect cash to be positive from investing activities as the investments in the firm have likely stopped and assets are being sold OD. All of the above a re signs of the decline phase.arrow_forwardWhat does a firm need to do to improve liquidity? O A. Stock up on inventory in order to never run out of stock O B. Extend credit terms to customers in order to gain more sales O C. Pay all bills and payables when due O D. Speed up collection of accounts receivable from customersarrow_forwardChoose from the drop down list the stage of the corporate life cycle the company described is experiencing: introductory/growth, maturity or decline. Assume the company being described follows a typical life cycle, a. The company is not generating positive cash from its operating activities. The company's cash flow from investing activities is negative as expenditures are being made for property, plant and equipment. Introductory/ Growth Decline Maturity C. The company has started to declare and pay dividends. d. The company's cash from operating activities and investing activities has begun to decline. e. Cash from investing activities is positive and the company is selling off excess assets. The company is experiencing positive cash flows from all three sources of cash: operating, investing and financing activities. f. 8. The company's cash from financing activities is negative. b.arrow_forward
- How can a small business invert the A/R cycle so that cash is received before a good or service is provided?arrow_forwardA Moving to the next question prevents changes to this answer. Question 2 Which of the following is not a purpose of the income statement? used to evaluate management's performance O predicts the company's füture assets and liabilities used to compare performance against other companies assesses the company's risk A Moving to the next question prevents changes to this answer. EN SRSCO PREMIUM SOUND esc EGO www %24 %23arrow_forwardIndicate whether the following statements are (True) or (False) and correct the false statements Profit maximization is the main goal of a business organization. The net accounting profit is the difference between the cash inflows and cash outflows of a given project. Financial markets are intermediaries that channel the savings of individual, businesses, and governments into loans or investments.arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub