🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeTextbook Notes300,000CA170,000

FIN 300 Chapter Notes - Chapter 2: Operating Cash Flow, Cash Flow, Income Statement

56 views1 pages
erinweasel649
9 Sep 2016
School
Ryerson University
Department
Finance
Course
FIN 300
Professor
Sergiy Rakhmayil

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Chapter 2 financial statements, cash flow, and taxes. The statement of financial position also known as the balance sheet is a snapshot of the firm. It organizes what a firm owns, what it owes, and the difference between the two. Assets are classified as current (life of less than one year) or fixed (long-term, tangible a truck, or intangible a trademark). Net working capital is the difference between a firm"s current assets and its current liabilities. The use of debt in a firm"s capital structure is called financial leverage. The more debt the firm has, the greater is its degree of financial leverage. Impairment losses are the amount by which the carrying value of an asset or cash-generating unit exceeds its recoverable amount. The statement of comprehensive income is also known as the income statement and it lists the revenues and expenses of the firm. Cash flow from assets = cash flow to bondholders + cash flow to shareholders.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents

FIN 300 Lecture Notes - Lecture 2: Operating Cash Flow, International Financial Reporting Standards, Tax Rate
mauvehound402
FIN 300 Chapter Notes - Chapter 2: Cash Flow, Financial Statement, Capital Cost Allowance
ultramarinemarten196
FIN 300 Lecture Notes - Lecture 2: International Financial Reporting Standards, Operating Cash Flow, Cash Flow
erintortoise764

Related Questions

Here is your first question:

Explain what current assets and fixed assets are and give as many examples as you can for each. What is the difference between tangible and intangible assets?

Liabilities and owner's equity are listed on the right-hand side respectively. Liabilities are also classified as current liabilities and long-term liabilities.

Here is your second question:

Explain what current liabilities differ from long-term liabilities and give as many examples as you can for each.

Owner's equity (also known as shareholders' equity, common equity) is the difference between total value of assets and total value of liabilities. That is, if you were to use your assets to pay off the debts, whatever is left over (the residual) would belong to shareholders. That is why they are known as residual claimants. Hence we have the identity;

Assets = Liabilities + Shareholders' equity

Net working capital is simply equal to current assets minus current liabilities. When net working capital is positive, it means cash that will be available over the next 12 months exceeds what must be paid. It is important for a healthy firm to have positive net working capital.

Here is your third question:

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70 and long-term debt of $200. What is shareholders' equity. Construct a balance sheet

for this company. Is net working capital positive or negative? If so by how much? (Hint: You may utilize Example 2.1 on page 24 of the textbook).

Problem 4-23
Ratio Analysis

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2014 (In Thousands)
Cash $153,615 Accounts payable $167,580
Receivables 516,705 Other current liabilities 139,650
Inventories 391,020 Notes payable 83,790
Total current assets $1,061,340 Total current liabilities $391,020
Long-term debt $349,125
Net fixed assets 335,160 Common equity 656,355
Total assets $1,396,500 Total liabilities and equity $1,396,500
Barry Computer Company:
Income Statement for Year Ended December 31, 2014 (In Thousands)
Sales $2,450,000
Cost of goods sold
Materials $1,102,500
Labor 661,500
Heat, light, and power 73,500
Indirect labor 196,000
Depreciation 98,000 $2,131,500
Gross profit $318,500
Selling expenses 171,500
General and administrative expenses 24,500
Earnings before interest and taxes (EBIT) $122,500
Interest expense 38,404
Earnings before taxes (EBT) 84,096
Federal and state income taxes (40%) 33,638
Net income $50,458
aCalculation is based on a 365-day year.

Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.
1) FIRM INDUSTRY
Profit margin ?% 1.92%
Total assets turnover ?x 1.98x
Equity multiplier ?


2) Outline Barry's strengths and weaknesses as revealed by your analysis.
Select the true statement

a)The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

b)The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.

c)The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

d)The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

e)The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

3) Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Select true statement

a) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.

b) If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.

c) If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.

d) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.

e) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2014 (In Thousands)
Cash $139,080 Accounts payable $139,080
Receivables 382,470 Other current liabilities 115,900
Inventories 231,800 Notes payable 127,490
Total current assets $753,350 Total current liabilities $382,470
Long-term debt $266,570
Net fixed assets 405,650 Common equity 509,960
Total assets $1,159,000 Total liabilities and equity $1,159,000
Barry Computer Company:
Income Statement for Year Ended December 31, 2014 (In Thousands)
Sales $1,900,000
Cost of goods sold
Materials $779,000
Labor 418,000
Heat, light, and power 95,000
Indirect labor 190,000
Depreciation 57,000 $1,539,000
Gross profit $361,000
Selling expenses 228,000
General and administrative expenses 19,000
Earnings before interest and taxes (EBIT) $114,000
Interest expense 26,657
Earnings before taxes (EBT) 87,343
Federal and state income taxes (40%) 34,937
Net income $52,406

1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.

Ratio Barry Industry Average
Current x 1.99x
Quick x 1.35x
Days sales outstandinga days 34.99days
Inventory turnover x 8.44x
Total assets turnover x 1.91x
Profit margin % 2.63%
ROA % 5.02%
ROE % 10.93%
ROIC % 7.90%
TIE x 3.20x
Debt/Total capital % 47.00%


aCalculation is based on a 365-day year.

2. Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places.

FIRM INDUSTRY
Profit margin % 2.63%
Total assets turnover x 1.91x
Equity multiplier

3. Outline Barry's strengths and weaknesses as revealed by your analysis. Select One below

a. The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

b. The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

c. The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.

d. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

e. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)

Select one below

a. If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price.

b. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price.

c. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price.

d. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price.

e. If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price.