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Why are retained earnings not considered an asset of the firm?

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2. Why are retained earnings not considered an asset of the firm?
Answer 2. The retained earnings is not an asset because it is considered a liability to the firm. The retrained earnings is an amount of money that the firm is setting aside to pay stockholders is case of a sale out or buy out of the firm. The holdings do not indicate a decision to buy or sale, simply a way to manage risk to the stockholders in the event of a buy or sale. Consequently, the retained earnings is a stockholder's equity.

3. How does net cash flow differ from net income and why?
Answer 3. Net income is a balanced result of total revenues made for the firm minus the total expenses incurred by the firm. If the result is positive, then the firm has made a profit. If the result is negative, then the firm has a loss. On the contrary, cash flows are generated from the sale of goods and services. The net cash flow is when the costs of running the firm are subtracted from the sale of goods and services. Net cash flow is a basically a measure of the amount of movement cash has entered and left the firm. Cash flows center about understanding the operating activities, long-term investing activities and financing activities.

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2. Why are retained earnings not considered an asset of the firm?
Answer 2. The retained earnings is not an asset because it is considered a liability to the firm. The retrained (should be retained) earnings is an amount of money that the firm is setting aside to pay stockholders is case of a sale out or buy out of the firm. The holdings do not indicate a decision to buy or sale, simply a way to manage risk to the stockholders in the event of a buy or sale. Consequently, the retained earnings is a stockholder's equity.

3. How does net cash flow differ from net income and why?
Answer 3. Net income is a balanced result of total ...

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The expert determines why retained earnings are not considered an asset of the firm.

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Turnaround case

Turnaround Strategies
Below are the balance sheet and income statement for 2005 and 2006 of a company that is in financial distress.
Balance Sheet for 2005 and 2006
2005 ($) 2006 ($)
Cash 20,000 5,000
Accounts receivables 150,000 395,000
Inventories 300,000 200,000
Total current assets 470,000 600,000
Fixed assets, net 350,000 350,000
Total assets 820,000 950,000
Accounts payable 85,000 170,000
Accruals 40,000 50,000
Bank loan 150,000 150,000
Total current liabilities 275,000 270,000
Long-term debt 325,000 500,000
Common stock ($5 par) 100,000 100,000
Capital Surplus 70,000 70,000
Retained Earnings 50,000 10,000
Total liabilities and equity 820,000 950,000
Income Statement for 2005 and 2006
2005 ($) 2006 ($)
Net sales 800,000 600,000
Cost of goods sold 500,000 400,000
Gross profit 300,000 200,000
Marketing 50,000 70,000
General and administrative 60,000 80,000
Depreciation 20,000 30,000
EBIT 170,000 20,000
Interest 50,000 60,000
Earnings before taxes 120,000 -40,000
Income taxes (35%) 42,000 0
Net income 78,000 -40,000
Your tasks:
1. Calculate the firm's total operating cycle for 2005 and 2006.
2. What type of working capital restructuring can the firm do to turn around its performance? What other types of asset restructuring might the firm consider?
3. What type of operations restructuring should the firm consider?
4. What type of financial restructuring should the firm consider?

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