FIN 360 Chapter 6: FIN360 module 6 notes

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sapphiregnat826

9 Nov 2016

School

Quinnipiac University

Department

Finance

Course

FIN 360

Professor

Thomas Coe

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Document Summary

This module describes the reporting and measuring of operating working capital, mainly receivables and inventories, and of long-term operating assets such as property, plant, and equipment. Long-term plant assets are often the largest component of operating assets. When companies dispose of fixed assets, a gain or loss may result. Understanding these gains and losses on asset sales is important as we assess performance. A(cid:374) a(cid:272)(cid:272)ou(cid:374)t re(cid:272)ei(cid:448)a(cid:271)le o(cid:374) the seller(cid:859)s (cid:271)ala(cid:374)(cid:272)e sheet is al(cid:449)ays (cid:373)at(cid:272)hed (cid:271)y a (cid:272)orrespo(cid:374)di(cid:374)g a(cid:272)(cid:272)ou(cid:374)t paya(cid:271)le o(cid:374) the (cid:271)uyer(cid:859)s (cid:271)ala(cid:374)(cid:272)e sheet. A(cid:272)(cid:272)ou(cid:374)ts re(cid:272)ei(cid:448)a(cid:271)le are reported o(cid:374) the seller(cid:859)s (cid:271)ala(cid:374)(cid:272)e sheet at (cid:374)et realiza(cid:271)le (cid:448)alue, (cid:449)hi(cid:272)h is the (cid:374)et amount the seller expects to collect. Accounts payable are unsecured liabilities, meaning that buyers have not pledged collateral to guarantee payment of amounts owed. As a result, when a company declares bankruptcy, accounts payable are comingled with other unsecured creditors (after the irs and the secured creditors), and are typically not paid in full.

Related Questions

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?

Please show ALL work and formulas

Tundra Tots is being liquidated under Chapter 7 of the Bankruptcy Act. Its current balance sheet is shown below. Fixed assets are sold for $25,000,000 and current assets are sold for $18,000,000. All fixed assets are pledged as collateral for mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $500,000. No employee is owed over $2,000.

Sale of current assets	18,000,000
Sale of fixed assets	25,000,000
Trustee costs	500,000

	Before		Before
	Default	Balance Sheet	Default
Current Assets	26,000,000	Accounts payable	4,000,000
Net fixed assets	50,000,000	Accrued taxes	90,000
		Accrued wages	250,000
		Notes payable	1,650,000
		Total current liabilities	5,990,000
		First-mortgage bonds	18,000,000
		Second-mortgage bonds	20,000,000
		Debentures	15,000,000
		Subordinated debentures	14,000,000
		Common stock	2,500,000
		Retained earnings	510,000
Total assets	76,000,000	Total claims	76,000,000

a. How much will shareholders receive?
b. How much will mortgage bondholders receive?
c. How much will priority creditors receive? Identify the priority creditors.

24. In 2012, the JCrew Company's sales were $15.0 million. Its balance sheet at year end 2012 is shown below. JCrew's 2013 sales are expected to be $21 million. Earnings after tax is expected to be 6.0% of sales, and annual dividends of $575,000 are expected to be paid in 2013. The company presently has excess plant and equipment capacity. As a result, assume that the net fixed asset figure on the balance sheet will remain constant for 2013. Assuming that the ratios of assets (except fixed assets, net) to sales and accounts payable to sales in 2012 remain the same in 2013, calculate the total amount, i.e., one number, of external financing required for 2013, using the percentage of sales method.

JCrew Co. Balance Sheet
(December 31, 2012)($ millions)
Current assets: Current liabilities:
Cash $0.5 Accts. payable $0.7
Accts. Rec. 1.5 Notes payable 0.8
Inventory 2.5 Long-term debt 2.3
Fixed assets, net 1.5 Stockholders' equity 2.2
Total Assets $6.0 Total Liabilities and Equity $6.0 (Points : 3.5)

A. $750,000
B. $220,000
C. $835,000
D. None of the above

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FIN 360 Chapter 6: FIN360 module 6 notes

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