FIN 300 Chapter Notes - Chapter 2: International Financial Reporting Standards, Financial Statement, Capital Asset

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bronzepig36

19 Jan 2017

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Chapter 2: financial statements, cash flow, and taxes. Statement of financial position: financial statement showing a rms accounting value on a particular date. Net working capital: the difference between a rms current assets and its current liabilities. Its a positive number when the cash that will be received over the next 12 months exceeds the cash that will be paid out. Nwc is usually positive in a healthy rm. Liquidity: ability to convert to cash quickly without a signi cant loss in value. Liquidity has two dimensions: ease of conversion versus loss of value. Liquid rms are less likely to experience nancial distress. The accounting value of a rms assets is frequently referred to as the carrying value or the book value of the assets. Market value is the price at which willing buyers and sellers trade the assets. Management"s job is to create value for the rm that is high than its cost.

Related Questions

Explain how the ratios help identify the strengths and weaknesses of the facility and the management team.

The students will use Financial Ratios to analyze a potential strategic acquisition.

The student will use the Financial Ratios to evaluate the current management teamâs ablity to make good long term and short term decisions. Should Acme continue to employ the current management team. If Beechtree is acquired, do we keep its management team or do build a new one

Ratio	Formula	Standard	Beechtree
Current Ratio (Liquidity)	Current Assets/Current Liabilities	1.3	1.15
Quick Ratio (liquidity)	(Current Assets-Supplies on hand)/Current Liabilities	1.2	.9
Days Cash on Hand (liquidity)	(Cash on Hand +Market Securities)/((Tot Operating Exp-Depreciation Exp)/365)	50	35
Days in Net Receivable (liquidity)	(Accounts Receivable +Notes Receivable + Other Receivable-allowance for uncollectable)/(Tot Operating Revenue/365)	49	65
Debt Service Coverage Ratio (solvency)	Net Operating Income/(Principal +interest + lease payment	>1	.89
Operating Margin (profitability)	Operating Income/Total Operating Revenue	>.05	-.005
Return on Total Assets (profitability)	Net Operating Income/Total Assets	1.1	.9

Net Operating Income for this financial statement=Decrease in unrestricted net assets + Interest Expense + Depreciation

scarletpug83

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.

FIN 300 Chapter Notes - Chapter 2: International Financial Reporting Standards, Financial Statement, Capital Asset

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