FIN 2800 Chapter Notes - Chapter 14: Accounts Receivable, Economic Order Quantity, Financial Statement Analysis

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erindog119

9 Nov 2016

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Book chapter 14 working capital and current assets management. Working capital management: management of current assets and current liabilities. Working capital: current assets, which represent the portion of investment that circulates from one form to another in the ordinary conduct of business. Net working capital: the difference between the firm"s current assets and its current liabilities (current assets < current liabilities means negative net working capital) Profitability: the relationship between revenues and costs generated by using the firm"s assets both current and fixed in productive activities. Risk (of insolvency): the probability that a firm will be unable to pay its bills as they come due. Insolvent: describes a firm that is unable to pay its bills as they come due. Permanent funding requirement: a constant investment in operating assets resulting from constant sales over time. Seasonal funding requirement: an investment in operating assets that varies over time as a result of cyclic sales.

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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).

Question 1:

Quantitative Problem: Rosnan Industries' 2013 and 2012 balance sheets and income statements are shown below.

Balance Sheets:
	2013	2012
Cash and equivalents	$70	$55
Accounts receivable	275	300
Inventories	375	350
Total current assets	$720	$705
Net plant and equipment	2,000	1,490
Total assets	$2,720	$2,195

Accounts payable	$150	$85
Accruals	75	50
Notes payable	120	145
Total current liabilities	$345	$280
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,720	$2,195

Income Statements:
	2013	2012
Sales	$2,000	$1,500
Operating costs excluding depreciation	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228

Dividends paid	$53	$48
Addition to retained earnings	$300	$180

Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.

What is Rosnan's 2013 net operating working capital (NOWC)?

What is Rosnan's 2013 net working capital (NWC)?

Question 2:

Balance Sheet

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.8 million and net plant and equipment equals $2.3 million. It has notes payable of $145,000, long-term debt of $754,000, and total common equity of $1.55 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.

Write out your answers completely. For example, 25 million should be entered as 25,000,000.

What is the company's total debt?

What is the amount of total liabilities and equity that appears on the firm's balance sheet?

What is the balance of current assets on the firm's balance sheet?

What is the balance of current liabilities on the firm's balance sheet?

What is the amount of accounts payable and accruals on its balance sheet? [Hint: Consider this as a single line item on the firm's balance sheet.]

What is the firm's net working capital?

What is the firm's net operating working capital?

What is the monetary difference between your answers to part f and g?

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.6 million and net plant and equipment equals $2.1 million. It has notes payable of $155,000, long-term debt of $855,000, and total common equity of $1.55 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.

Write out your answers completely. For example, 25 million should be entered as 25,000,000.

What is the amount of total liabilities and equity that appears on the firm's balance sheet?

What is the balance of current assets on the firm's balance sheet?

What is the balance of current liabilities on the firm's balance sheet?

What is the amount of accounts payable and accruals on its balance sheet? [Hint: Consider this as a single line item on the firm's balance sheet.]

What is the firm's net working capital?

What is the firm's net operating working capital?

What is the monetary difference between your answers to part e and f?

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FIN 2800 Chapter Notes - Chapter 14: Accounts Receivable, Economic Order Quantity, Financial Statement Analysis

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