FINA 2201 Chapter Notes - Chapter 2: Market Liquidity, Fixed Asset, Capital Structure

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fuchsiamosquito871

28 Sep 2017

School

Northeastern University

Department

Finance & Insurance

Course

FINA 2201

Professor

Jianqiu Bai

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Document Summary

A snapshot of the firm at that point in time. Assets are on the left side, liabilities and owner"s equity are on the right. Current asset has a life of less than one year. Asset will convert to cash within 12 months. Classified as either current or long term. Current liabilities have a life of less than one year. A debt that is not due in the coming year is classified as a long term liability. Bond and bondholders generically refer to long term debt and long term creditors. Whatever residual value of all assets and debts cleared would belong to the shareholder. Assets = liabilities + shareholder"s equity (balance sheet identity/equation) Net working capital: difference between a firm"s current assets and its current liabilities is called net working capital. 3 things to keep in mind when examining balance sheet: liquidity, debt versus equity, and market value versus book value. Inventory is probably the least liquid of the current assets.

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).

Total Current Asset Current Ratio Effect on Net Income

a		Cash is acquired through issuance of additional common stock		____		____		____
b	Merchandise is sold for cash		____		____		____
c	Federal income tax due for the previous year is paid		____		____		____
d	A fixed asset is sold for less than book value		____		____		____
e	A fixed asset is sold for more than book value		____		____		____
f	Merchandise is sold on credit		____		____		____
g	Payment is made to trade creditors for previous purchases		____		____		____
h	A cash dividend is declared and paid		____		____		____
I	Cash is obtained through short- term bank loans		____		____		____
J	Short- term notes receivable are sold at a discount		____		____		____
k	Marketable securities are sold below cost		____		____		____
L	Advances are made to employees		____		____		____
m	Current operating expenses are paid		____		____		____
n	Short- term promissory notes are issued to trade creditors in exchange for past due accounts payable		____		____		____
o	10- year notes are issued to pay off accounts payable		____		____		____
p	A fully depreciated asset is retired		____		____		____

4 DEBT RATIO- Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its equity ratio? What is its debt ratio?

6 MARKET/BOOK RATIO- Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt and $6 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per share. What is Jaster

greenshark669

The 2012 income statement of Adrian Express reports sales of $21 million, cost of goods sold of $12.6 million, and net income of $2.6 million. Balance sheet information is provided in the following table. All amounts are in thousands.

ADRIAN EXPRESS
Balance Sheets
December 31, 2012 and 2011
($ in 000s) 2012 2011
Assets
Current assets:
Cash $ 680 $ 840
Accounts receivable 1,820 1,420
Inventory 1,800 1,400
Long-term assets 5,200 4,480

Total assets $ 9,500 $ 8,140

Liabilities and Stockholders' Equity
Current liabilities $ 2,260 $ 1,900
Long-term liabilities 2,600 2,700
Common stock 2,000 2,000
Retained earnings 2,640 1,540

Total liabilities and stockholders' equity $ 9,500 $ 8,140

Industry averages for the following four risk ratios are as follows:

Average collection period 27 days
Average days in inventory 46 days
Current ratio 2 to 1
Debt to equity ratio 50%

Required:

Calculate the four risk ratios listed above for Adrian Express in 2012. (Use 365 days in a year. Round your answers to 1 decimal place. Omit the "%" sign in your response.)

Risk Ratios
Average collection period days
Average days in inventory days
Current ratio to 1
Debt to equity ratio %

2. Do you think the company is more risky or less risky than the industry averages?

(Click to select)
Less risky
More risky

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FINA 2201 Chapter Notes - Chapter 2: Market Liquidity, Fixed Asset, Capital Structure

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