Business Administration 1220E Study Guide - Midterm Guide: Current Liability, Pest Analysis, Retained Earnings
Course CodeBusiness Administration 1220E
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1220 Finance How To’s
always a short-term working capital loan (line of credit)
determined by calculating the difference between total assets and total liabilities and equity
a positive plug implies that the company does not have enough liabilities and equity to fully
fund their assets and therefore requires a working capital loan
Statement of Cash Flows Analysis
Source or Use of Cash?
-when assets decrease (source) —> assets are sold and you receive cash
-when assets increase (use) —> you gain an asset but are using cash to
-when liabilities increase (source) —> you take on a $100 loan, you
receive cash but are liable to pay the loan back
-when liabilities decrease (use) —> you pay off a loan therefore your
liability decreases and you use your cash
Three Sections on a SCF
1. operations —> shows how much cash is being generated by, and spent on, regular daily
2. financing activities —> shows how much cash was generated through financing activities
(debt or equity)
3. investing activities —> shows how much cash was used or generated from investments
(looking at fixed assets)
Interpreting the SCF: Five Questions to Ask
1. was cash generated from operations? (is the engine of the business running?)
2. is net income a source of cash? what does this tell us?
3. what are the sources and uses of cash from operations?
4. what are the remaining major sources and uses?
5. recommendations for the future?
Financial Ratio Analysis
-vertical analysis expresses SOE items as a percentage of net sales
-return on equity (ROE) —> measures the income generated as a percentage of the company’s
equity, the amount of income the company makes for each dollar invested by the owners,
looks at the return on capital invested in the business (earnings/average equity), rising trend
indicates more profits for less equity
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1220 Finance How To’s
-how well does a company use its resources to generate a return?
-age of AR —> AR / (sales/365)
number of days it takes to collect money from those who owe (customers)
-age of inventory —> inventory / (COGS/365)
number of days inventory will sit before it is sold
-age of AP —> AP / (purchases/365)
number of days it takes to pay creditors (suppliers)
-can the company meet its short-term obligations (current liabilities)?
-current ratio —> current assets/current liabilities (should be 2:1)
-acid test —> (cash+MS+AR)/current liabilities (should be 1:1) — do not include inventory
-how much excess capital (money) is there to work with after short-term debts are paid?
-Net Worth to (:) Total Assets —> total equity/assets
how much of the assets are financed by equity?
-Debt to (:) Equity —> debt/equity
for each $1.00 in equity, how many $s are there in liabilities?
-Interest Coverage —> EBIT (earnings before interest tax)/interest X (should be 4:1)
can the company pay the interest on its debt?
Same $ v.s. Same %
general and admin expense
legal and accounting expense
bad debt expense
ad and promo expense
property tax expense
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