Free Cash Flow

The formula for Free Cash Flow is:

Free Cash Flow = Cash Provided by Operations – Capital Expenditures – Cash Dividends

Free Cash Flow is determined from the Statement of Cash Flows. This accounting evaluation is used to determine whether the company has sufficient cash to maintain its operations, invest in new assets and pay dividends to stockholders. Essentially free cash flow is what cash is left over after the company invests in what it needs to produce a product/ service and pays the investors.

What does 2/10 n/30 mean?

2/10 or 1/10 n/30 are discounts that offer an incentive for a customer to pay for purchases in a timely manner. A company offering terms of 2/10 is offering a discount of 2% provided that the invoice is paid within 10 days.
This amounts to a sizable interest rate for paying quickly.

• Paying invoices during the discount period benefits the payer with a savings.
• Speeds up the cash collection for the company offering the incentive, but at a cost.
• Should a company not take advantage of the discount, then the n/30 simply means that the invoice is due within 30 days at the full amount. 

In first semester accounting, this concept is relatively simple, but in later semesters the issue becomes more complex. To account for the discount, debit cash for the actual amount received, debit sales discounts for the deduction taken, and credit accounts payable for the full amount.

Example:
Company A purchases $5000 in inventory from Company B. Terms of the sale are 2/10 n/30.
Within ten days Company A remits the invoice; $5000. less 2% equals $4900.
Company B makes the following journal entries:

Debit Cash 4900
Debit Sales (or Service) discounts  $100
                    Credit Accounts Receivable $5000


Or Within 30 days (but more than 10 days) Company A pays the invoice.

Company B makes the following journal entries:

Debit Cash 5000
      Credit Accounts Receivable $5000

The difference is that Company A did not take advantage of the discount and paid after the 10 days, so they remit the full amount of the invoice.

Natural Balances

In accounting, T-Accounts have a natural balance side. 

This relates to the basic accounting equation:

Assets = Liabilities + Stockholders’ Equity

Assets have a natural balance on the Debit side of the T-Account. When the balance of Assets is increased, the entry is placed into the debit (left) side of the account. Cash coming in is always a debit as is any other asset being acquired: Accounts Receivable, Equipment, Property, Plant, Investments, and Inventory. Reductions in assets are placed on the credit (right) side of the T-Account, such as when cash is paid out.
A credit balance on an asset account would indicate a problem with the T-Account. Why? An asset with a balance on the credit side would indicate a negative asset. What is negative cash? This cannot exist in accounting as a balance on the credit side would be indicative of a liability rather than as an asset. The same is true for equipment as a credit balance would indicate that the equipment's value is less than zero. Can an Account Receivable be negative? This would indicate that someone overpaid their invoice and therefore is entitled to a refund, therefore a credit balance in the Account Receivables could be considered a liability.

Liabilities have a natural balance on the Credit (right) side of the T-Account. When liabilities are increasing such as Accounts Payable, the T-Account is credited with the transaction. When a liability is paid, a debit is entered to reduce the balance of the account. 

Stockholders’ Equity or SE has a natural balance on the Credit side of the T-Account. When stock is purchased by an investor, the cash received by the company is debited as it increases the cash asset; in turn the common stock account is credited. 

Retained Earnings has a natural Credit balance as most companies hope to earn a profit. Should the balance be on the Debit side that would indicate the company is losing money. 

Dividends have a normal balance of on the Debit side. 

Why? Because cash was used to pay the dividend and the dividends paid also reduce Retained Earnings. 

Expenses have a normal balance on the Debit side. 

Why? When cash was paid or liabilities were incurred those transactions were recorded on the Credit Side. To balance the accounting equation, expenses must be entered on the debit side. 

Revenues have a normal balance on the Credit side. 

Why? When cash was received or an Accounts Receivable was earned, those entries are Debits, therefore, to balance the accounting equation, revenues must be entered on the credit side.