AFM101 Chapter Notes - Chapter 1: Financial Statement, Deferral, Human Capital

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amberkangaroo617

8 Oct 2013

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

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AFM101 Full Course Notes

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Economic benefit (does it contribute to cash, do we control it, and benefits expected in the future) Need to measure its financial value reliably (market value?) To recognize an asset, there must be a dollar value to it. If you lease a car, you don"t actually own it, so the prepayment for the car (prepaid expenses) is an asset but the car itself isn"t. A thousand objective measurements experts have agreed to measure the financial value of the assets identified earlier for a representative people. Medium cars, homes large human capital, patents. Would the dispersion associated with intel"s internally developed patent be closer to cash, car or human capital of a student (human capital) Obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefit. To be recognized on the balance sheet: The dispersion of objective experts" estimate of the values of liabilities can differ greatly.

Related Questions

Small business management class.

Please answer the two questions from the article belowplease.

Q1)Which one of the techniques to increase cash inflows is bestillustrated in the article? Explain how you know. ?

Q2)Which one of the techniques to decrease cash outflows is bestillustrated in the article? Explain how you know. ?

The article:

The financial crisis on Wall Street is quickly spiraling down tosmall businesses, making it extremely difficult for them to securefrom large banks the credit they need to start and maintain theiroperations.

Some businesses that currently have good relationships withbanks are getting more scrutiny and higher interest rates -- suchas 15% or more. Riskier borrowers are being denied creditaltogether.

Aside from falling back on friends or family -- or charging upyet another credit card -- here's a look at five alternatives forgetting extra cash to run a business in this economy.

-- Peer-to-Peer Lending Sites

Several Web sites now facilitate loans between individuals whodon't know each other. Typically, the prospective borrowers createprofiles that include how much they need to borrow, what the moneywill be used for and some credit history.

Other individuals can browse the loan requests and make offersthat include payment terms and interest rates. Prospective lendersalso get a risk assessment of the borrower generated by the Website based on the borrower's credit history.

Some "peer-to-peer" lending sites include LendingClub.com,Prosper.com, RaiseCapital.com and Zopa.com.

On Prosper.com, for instance, 25% of borrowers are individualsrunning or looking to start businesses, says Chief Executive ChrisLarsen. The site facilitates loans between individuals from $1,000to $25,000, and interest rates on those loans right now range from6% for those with the strongest credit ratings to about 30%.

Prosper, which has 800,000 registered users, is seeing moreentrepreneurs with good credit scores signing up. "We're certainlyseeing a steady increase of the quality of borrower coming to oursite," Mr. Larsen says. About 55% of the loans being funded are forborrowers with credit scores above 720, he adds, while only about5% are for those categorized as "subprime" borrowers.

-- Community Banks, Credit Unions

While big banks are being battered by all the financial turmoilon Wall Street, many local banks and credit unions are far morestable.

In fact, community banks continue to expand, although some havesuffered losses on securities issued by troubled mortgage giantsFannie Mae and Freddie Mac, says Camden Fine, chief executive ofthe Independent Community Bankers of America, an industryassociation in Washington.

Still, he says, even the community banks are more hesitant tolend to companies that lack rock-solid balance sheets.

-- Factoring, Asset-Based Loans

Though certainly not a cheap route to capital, some banks andnon- bank financing companies offer financing that is backed by abusiness's assets or accounts receivable.

So-called factoring, where a lender might, say, outright give aborrower 80 cents on the dollar for the company's accountsreceivable, can be a good option for businesses like manufacturersthat are owed a lot of money by customers and that have no betterlending option right now, says Raphael Amit, an entrepreneurshipprofessor at the University of Pennsylvania's Wharton School.

Interest rates on such financing can sometimes run 15% orhigher, so it's best to only resort to this approach when there'sno lower-cost option.

So-called asset-based loans -- loans in which assets such asinventory, equipment or real estate are used as collateral -- canbe good options for companies with lots of assets. But again, ratestend to run much higher than on traditional bank loans. The loanamounts are often capped at a percentage of the assessed value ofthe assets, such as 65%.

Also, even loans backed by assets can be difficult to get forcompanies with less-than-stellar credit ratings. Mark Sunshine,president of First Capital, a West Palm Beach, Fla., financecompany, says he's seeing more demand for loans based on accountsreceivable or assets, but isn't necessarily doing much morebusiness. "There's a reason local banks won't lend them money," hesays of riskier small companies. He says he's sticking to companieswith lots of assets to use as collateral.

-- Negotiating With Customers or Suppliers

Another smart strategy for helping cash flow -- perhaps even ifyou do have access to loans -- is striking better payment termswith customers and suppliers, Prof. Amit says. Especially whenbusiness relationships are strong and long-lasting, many companiesare willing to help each other out in tough economies.

A business that usually gives customers 30 to 60 days to pay thebills, for instance, might require customers to pay upon receipt ofgoods. A supplier, on the other hand, might be willing to extendlengthier payment terms to a business customer if it feels thecustomer is trustworthy and vital to its own business. Somesuppliers also will lend money to their longstanding, most valuedcustomers.

-- Changing Behaviors

Hard times call for small businesses to be nimble andentrepreneurial. Many businesses are using the tough economy toscrutinize their business practices and find creative ways tocreate better cash flow.

Some turn to leasing instead of buying equipment they need.

Others are identifying areas of the business that will tend tobe more lucrative in today's economy and shifting their resourcesin those directions.

Can someone help with this case please, and:

Fill in all the blanks spaces in the spreadsheet for the 2017 column and the 2017 %rev column

Balance the B/S

Answer all questions in full sentence format

Please put in the correct number for forecasted PP&E based on narrative (I highlighted the phrase in the narrative)

Show work for how you calculated the forecasted interest for 2017.

Thank you so much for all your help.

After the financial analysis based on 2016 preliminary estimates was completed, a number of changes were adopted to improve financial and business results for S&S Air during 2016. The customer that awarded the large 40 aircraft order agreed to make interim payments as finished aircraft were delivered (for a price concession). Revenue was revised up slightly due to updated marketing plans. Expenses were trimmed and controls were established that greatly reduced on hand inventory needs. A portion of the line of credit was converted to a 5 year, fixed rate loan. Cash on hand and general liquidity was forecasted to improve to acceptable levels by the end of the year.

Mark and Marie approached Chris about creating a forecast for 2017. They had learned the value of the financial analysis done for 2016 and wanted to get a look at any issues or problems that might be looming in the future. Of particular concern was the continuing need for external funds as the firm continued to grow. The general consensus of Mark and Marie was that S&S Air should realize an increase in revenue of 17% in 2017 from the 2016 results, based on anticipated demand of aircraft. It was felt expenses would change by the same percent of sales as incurred in 2016. However, it was estimated that annual depreciation in 2017 would increase 70% (to a total of $1,075,000), due to the substantial increase in assets that were going to be needed. Finally, Chris said that her banking contract indicted that interest expense should be about 8% of both notes payable and long term debt in 2017.

By the end of 2016, the firm would be operating at capacity; it was estimated that further growth in 2017 would require $6,500,000 (including all depreciation â that is, adding $6.5 million to the 2016 Net PP&E to derive PP&E for 2017) in plant upgrades and additions to meet anticipated production volume. Everyone felt that all other asset categories (including cash) and current liabilities (including the line of credit) would change by percent of revenue. Both owners were concerned about where any needed external financing would come from. Neither was interested in raising any further equity, and agreed that they would likely secure long term financing for any external funds needed. The plan was to pay dividends totaling $400,000 in 2017.

Chris knew that a key exhibit would be the forecast mode. She planned to set up the model so that a key input would be the sales growth forecast. The âplugâ to reconcile the balance sheet would be long term debt.

Q U E S T I O N S (please use full sentences)

1) Completed forecast model. Fill in all blanks for the 2017 and 2017 % of rev columns.

2) Compare PM, ROA, and ROE from 2016 to 2017. Why the differences?

3) Compare debt ratios from 2016 to 2017. Why the differences?

4) Compare total asset turnover from 2016 to 2017. Why the difference? What observations can you make regarding capacity utilization from 2016 to 2017?

5) Estimate the maximum revenue possible given the new level of assets in 2017, based on TATO in 2016 (at full capacity).

6) If COGS could be decreased by 1% of revenue, how much increase in EBIT would result? Express the change in EBIT in both dollar terms and % change.

7) Do a DuPont analysis on S&S Air for both 2016 and 2017. If the owners asked you for any issues or concerns about the basic results forecasted for 2017, what would you tell them? Consider operating, investing, and financing issues.

7a) Operating comments:

7b) Investing comments:

7c) Financing comments:

Income statement	2016	% rev			2017	% rev
Sales	$21,566,000	100.0%		17%%
COGS	14,786,000	68.6%	% of rev	68.6%
Other expenses	2,375,000	11.0%	% of rev	11.0%
Depreciation	625,000	2.9%	given	1,075,000
EBIT	3,780,000	17.5%	calc
Interest	437,000	2.0%	given	8.0%
Taxable income	3,343,000	15.5%	calc
Taxes (40%)	1,337,200	6.2%	calc TI * tax rate	40.0%
Net income	2,005,800	9.3%	calc
Dividends	375,000	1.7%	given	400,000
Add to RE	1,630,800	7.6%	calc

B A L A N C E S H E E T
	2016	% rev			2017	%
Current Assets
Cash	425,000	2.0%	% of rev	2.0%
Accounts rec.	855,000	4.0%	% of rev	4.0%
Inventory	689,000	3.2%	% of rev	3.2%
Total CA	1,969,000	9.1%	calc
Fixed assets
Net PP&E	9,873,000	45.8%	given	6,500,000
Total Assets	11,842,000	54.9%	calc

Current Liabilities
Accounts Payable	727,000	3.4%	% of rev	3.4%
Notes Payable	1,467,000	6.8%	% of rev	6.8%
Total CL	2,194,000	10.2%	calc
Long-term debt	2,908,800	13.5%	PLUG
TOTAL CL + LTL	5,102,800

Shareholder Equity
Common stock	120,000	0.6%	no change
Retained earnings	6,619,200	30.7%	+2017 RE
Total Equity	6,739,200	31.2%	calc

Total L&E	11,842,000	54.9%	calc

Ratio Analysis
	2016	2017
PM
ROA
ROE
Debt / Equity
Debt / Total Assets
Equity Multiplier
Total Asset TO

Thank you

AFM101 Chapter Notes - Chapter 1: Financial Statement, Deferral, Human Capital

AFM101 Full Course Notes

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