FNBU 3441 Chapter Notes - Chapter 2: Current Liability, Accounts Payable, Cash Flow

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olivebeetle740

30 Aug 2018

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Chapter 2: financial statements, taxes, and cash flow. Important things to keep in mind: liquidity, debt vs. equity, and market value vs. book value. Assets: the left side: fixed long life, can either be tangible or intangible, current life of less than a year / will cover to cash within 12 months (i. e. inventory, cash, accounts receivable) Liabilities and owne(cid:396)s" e(cid:395)uity: the right side: current must be paid within a year (i. e. accounts payable, long-term. Shareholders equity = assets - liabilities (balance sheet identity) Net working capital: current assets - current liabilities. Liquidity: how fast an asset can be converted to cash, 2 dimensions ease of conversion and loss of value. Any asset can be converted to cash quickly if we cut the price enough. Highly liquid assets can be sold without significant loss of value. Illiquid assets cannot be sold without substantial price reduction: assets in balance sheet are listed in order of decreasing liquidity.

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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).

Use the following information to answer the following questions.

ABC, Inc. Income Statement (in thousands)

December 31, 2014

Sales $200,000

Cost of goods sold 140,000

Gross profit on sales 60,000

Operating expenses 56,000

Operating income (EBIT) 4,000

Interest expense 1,000

Earnings before tax 3,000

Income tax 1,050

Net income available to common stockholders $1,950

Number of shares outstanding 1, 500

Market price per share $22

ABC, Inc. Balance Sheet (in thousands)

December 31, 2014

Assets

Cash $2,000

Accounts receivable 17,800

Inventories 8,700

Total current assets 28,500

Gross fixed assets 70,000

Accumulated depreciation 26,500

Net fixed assets 43,500

Total assets $72,000

Liabilities and Equity

Accounts payable $18,000

Accruals 13,350

Total current liabilities 31,350

Long-term debt 8,250

Total liabilities 39,600

Common stock (par value and paid in capital) 2,000

Retained earnings 30,400

Total stockholders' equity 32,400

Total liabilities and equity $72,000

Industry Key Ratios

Industry Average Ratios

Current ratio 1.1

Quick ratio 0.60

Days Sales Outstanding (DSO) 25 days

Fixed assets turnover 5.8

Total asset turnover 2.95

Liabilities-to-assets ratio 65%

Times-interest-earned 3.2

Net profit margin 1.3%

Return on equity 7.32%

Price/earnings ratio 20.38

Market/book ratio 3.19

Calculate current ratio and acid test ratio for the firm.

Calculate DSO, fixed assets turnover, and total asset turnover for the firm.

Calculate liabilities-to-assets ratio and times-interest-earned ratio for the firm.

Calculate net profit margin and return on equity for the firm.

Evaluate the performance of the firm in the following areas:

Liquidity management

Asset management

Debt management

Profitability management

When you explain the firm

skymallard37

Lloyd Inc. has sales of $ 200,000, a net income of $ 15,000, and the following balance sheet: Cash $ 10,000 Accounts payable $ 30,000 Receivables 50,000 Other current liabilities 20,000 Inventories 150,000 Long- term debt 50,000 Net fixed assets 90,000 Common equity 200,000 Total assets $ 300,000 Total liabilities and equity $ 300,000 The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5X, without affecting sales or net income. If inventories are sold off and not replaced ( thus reducing the current ratio to 2.5X), if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the ROE change? What will be the firm's new quick ratio?

rubyturtle713

FNBU 3441 Chapter Notes - Chapter 2: Current Liability, Accounts Payable, Cash Flow

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