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ACG-2021 Lecture Notes - Lecture 2: Promissory Note, Accounts Payable, Current Liability

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School
FSU
Department
Accounting
Course
ACG-2021
Professor
Paterson

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Document Summary

Presents a snapshot at a point in time. To improve understanding, companies group similar assets and similar liabilities together. Having subsections w/in assets/liabilities helps users organize and deal with certain objects. Assets that a company expects to convert to cash or use up within one year of the operating cycle, whichever is longer. Operating cycle is the average time it takes from the purchase of inventory, sell it to customers, and collect the cash from customers. Unless noted, we will assume that companies" operating cycles are shorter than one year. Current asset ex: cash, investments, receivables, inventories. Investments in stocks and bonds of other corporations that are held for more than one year. Long-term assets such as land or buildings that a company is not currently using in its operating activities. Depreciation = allocating the cost of assets to a number of years. Accumulated depreciation - total amount of depreciation expensed thus far in the asset"s life.

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Related Questions

Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three years follow:

CERMCO Balance Sheet December 31
20X5 20X4 20X3
Assets
Current assets
Cash and cash equivalents $390 $1,386 $2,603
Short-term investments — — —
Net receivables 720 664 1,225
Inventory — — —
Other current assets 412 469 892
Total current assets $1,522 $2,519 $4,720
Long-term investments 1,215 — —
Property, plant, and equipment 76 258 454
Goodwill 545 1,757 2,194
Intangible assets 999 1,844 3,644
Accumulated amortization — — —
Other assets — — —
Deferred long-term asset charges — — —
Total assets $4,357 $6,378 $11,012
Liabilities
Current liabilities
Accounts payable $469 $1,174 $1,436
Short/Current long-term debt — — 600
Other current liabilities 1,227 1,358 1,496
Total current liabilities $1,696 $2,532 $3,532
Long-term debt — — —
Other liabilities — — —
Deferred long-term liability charges — — —
Minority Interest — — —
Negative goodwill — — —
Total liabilities 1,696 2,532 3,532
Stockholders' equity
Misc. stock option warrants — — —
Redeemable preferred stock — — —
Preferred stock 3,014 3,211 2,333
Common stock 16 16 13
Retained earnings –25,513 –23,814 –19,165
Treasury stock — — —
Capital surplus 25,168 25,564 25,862
Other stockholders’ equity –24 –1,131 –1,563
Total stockholders’ equity $2,661 $3,846 $7,480

Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.

Cermco produces and sells specialty customer relationshipmanagement (CRM) solutions to small and medium-size businesses inthe United States and Canada. The company is more than 20 years oldand has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of itsproduct to easily integrate with various accounting and ERPsystems. As a result, even when clients upgrade their entireaccounting systems to expensive ERP solutions, they continue to useCermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about$11 million (20X3), $7 million (20X4), and $3 million (20X5),respectively. Overall interest expenses and operating margins haveremained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in marketshare as a result of natural client turnover and the entrance ofmany other small competing software companies into the market.Nevertheless, Cermco’s CRM product continues to enjoy the highestindustry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three yearsfollow:

CERMCO

Balance Sheet

December 31

20X5

20X4

20X3

Assets

Current assets

Cash and cash equivalents

$390

$1,386

$2,603

Short-term investments

—

—

—

Net receivables

720

664

1,225

Inventory

—

—

—

Other current assets

412

469

892

Total current assets

$1,522

$2,519

$4,720

Long-term investments

1,215

—

—

Property, plant, and equipment

76

258

454

Goodwill

545

1,757

2,194

Intangible assets

999

1,844

3,644

Accumulated amortization

—

—

—

Other assets

—

—

—

Deferred long-term asset charges

—

—

—

Total assets

$4,357

$6,378

$11,012

Liabilities

Current liabilities

Accounts payable

$469

$1,174

$1,436

Short/Current long-term debt

—

—

600

Other current liabilities

1,227

1,358

1,496

Total current liabilities

$1,696

$2,532

$3,532

Long-term debt

—

—

—

Other liabilities

—

—

—

Deferred long-term liability charges

—

—

—

Minority Interest

—

—

—

Negative goodwill

—

—

—

Total liabilities

1,696

2,532

3,532

Stockholders' equity

Misc. stock option warrants

—

—

—

Redeemable preferred stock

—

—

—

Preferred stock

3,014

3,211

2,333

Common stock

16

16

13

Retained earnings

–25,513

–23,814

–19,165

Treasury stock

—

—

—

Capital surplus

25,168

25,564

25,862

Other stockholders’ equity

–24

–1,131

–1,563

Total stockholders’ equity

$2,661

$3,846

$7,480

Produce a valuation estimate for Cermco for December 31, 20X5.Use whatever valuation method you think best but justify yourchoice. Note that you can estimate the annual income fromyear-to-year changes in the balance sheet.

A fire destroyed your firm’s ending balance sheet and income statement after the year-end
but before the financial statements are released. However, you have been successful in obtaining the
numbers for the beginning balance sheet and the statement of cash flows, which are provided to you and
your team members in Excel format. Fields representing the missing balance sheet and income statement
are End of year2 in the Excel sheet

CONSOLIDATED BALANCE SHEETS (USD $) End of year 2 End of year 1
In Thousands, unless otherwise specified
Current assets:
Cash and cash equivalents 　 598
Receivables, net 　 230
Inventories, net 　 2309
Other current assets 　 47
Total current assets 　 3184
Property and equipment, net of accumulated depreciation 　 1292
Assets held for sale 　 1
Goodwill 　 76
Intangible assets, net 　 29
Other assets, net 　 32
Assets, Total 　 4614
Current liabilities: 　 0
Current portion of long-term debt 　 0
Accounts payable 　 2030
Accrued expenses 　 380
Other current liabilities 　 150
Total current liabilities 　 2560
Long-term debt 　 604
Other long-term liabilities 　 239
Commitments and Contingencies 　 0
Stockholders Equity Attributable to Parent [Abstract] 　 0
Preferred stock, nonvoting, $00001 par value 　 0
Common stock, voting, $00001 par value 　 0
Additional paid-in capital 　 520
Treasury stock, at cost 　 -27
Accumulated other comprehensive income (loss) 　 3
Retained earnings 　 715
Total stockholders equity 　 1210
Liabilities and Stockholders Equity, Total 　 4613
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) 12 Months Ended
In Thousands, except Per Share data, unless otherwise specified Year 2
Net sales 　
Cost of sales, including purchasing and warehousing costs 　
Gross profit 　
Selling, general and administrative expenses 　
Operating income 　
Interest expense 　
Other income, net 　
Total other, net 　
Income before provision for income taxes 　
Provision for income taxes 　
Net income 　
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) 12 Months Ended
In Thousands, unless otherwise specified Year 2
Cash flows from operating activities:
Net income $392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 208
Share-based compensation 13
Loss on property and equipment, net 1
Other 2
Provision for deferred income taxes -2
Excess tax benefit from share-based compensation -16
Increase Decrease in Operating Capital
Receivables, net -32
Inventories, net -204
Other assets 11
Accounts payable 113
Accrued expenses 63
Other liabilities -4
Net cash provided by operating activities 545
Cash flows from investing activities:
Purchases of property and equipment -196
Payments to Acquire Businesses, Gross -186
Sale of certain assets of acquired business 19
Proceeds from sales of property and equipment 1
Net cash used in investing activities -362
Cash flows from financing activities:
(Decrease) increase in bank overdrafts -3
Decrease in financed vendor accounts payable 0
Issuance of senior unsecured notes 449
Payment of debt related costs -9
Borrowings under credit facilities 0
Payments on credit facilities 0
Dividends paid -18
Proceeds from the issuance of common stock, primarily exercise of stock options 4
Tax withholdings related to the exercise of stock appreciation rights -22
Excess tax benefit from share-based compensation 16
Repurchase of common stock -81
Contingent payment accrued on acquisitions 5
Other -1
Net cash provided by (used in) financing activities 331
Net increase (decrease) in cash and cash equivalents 514
Cash and cash equivalents, beginning of period 598
Cash and cash equivalents, end of period 1,112
Supplemental cash flow information:
Interest paid 35
Income tax payments 219
Non-cash transactions:
Accrued purchases of property and equipment 21
Retirement of common stock 0
Contingent consideration accrued on acquisitions 0
Changes in other comprehensive income 1
Declared but unpaid cash dividends $4