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FIN 360 Chapter Notes - Chapter 7: Accounts Payable, Promissory Note, Current Liability

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sapphiregnat826
11 Nov 2016
School
Quinnipiac University
Department
Finance
Course
FIN 360
Professor
Thomas Coe

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Document Summary

Just as asset disclosures provide us with information on where a company invests its funds, its liability and equity disclosures inform us as to how those assets are financed. Current liabilities (such as accounts payable and accrued liabilities) are generally non- interest-bearing. As a result, companies try to maximize the financing of their assets with these sources of funds. Current liabilities consist of both operating and non-operating liabilities: current operating, accounts payable, utilities, wages, insurance, rent, taxes (accrued liabilities, current non-operating liabilities, short-term bank notes, current portion. Effects on balance sheet and income statement: purchase of inventory is reflected on the balance sheet as an increase in inventory and an increase in accounts payable. Sale of inventory involves two components revenue and expense. Accounts payable turnover(apt) - (cid:396)efle(cid:272)ts (cid:373)a(cid:374)age(cid:373)e(cid:374)t"s su(cid:272)(cid:272)ess i(cid:374) usi(cid:374)g t(cid:396)ade (cid:272)(cid:396)edit to finance purchases of goods and services. Apt = cost of goods sold/ average accounts payable.

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Related Questions

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
Answer Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
.2 points
Question 9

Which of the following statements is CORRECT?
Answer Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
.2 points
Question 10

Spontaneous funds are generally defined as follows:
Answer Assets required per dollar of sales.
A forecasting approach in which the forecasted percentage of sales for each item is held constant.
Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm

Additional funds needed

Morrissey Technologies Inc.'s 2012 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012
Cash $180,000 Accounts payable $360,000
Receivables 360,000 Notes payable 56,000
Inventories 720,000 Accrued liabilities 180,000
Total current assets $1,260,000 Total current liabilities $596,000
Long-term debt 100,000
Fixed assets 1,440,000 Common stock 1,800,000
Retained earnings 204,000
Total assets $2,700,000 Total liabilities and equity $2,700,000
Morrissey Technologies Inc.: Income Statement for December 31, 2012
Sales $3,600,000
Operating costs including depreciation 3,279,720
EBIT $320,280
Interest 20,280
EBT $300,000
Taxes (40%) 120,000
Net Income $180,000
Per Share Data:
Common stock price $45.00
Earnings per share (EPS) $1.80
Dividends per share (DPS) $1.08

Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

  1. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.
    Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013
    2012 2013 Pro Forma
    Sales $3,600,000 $
    Operating costs (includes depreciation) 3,279,720 $
    EBIT $320,280 $
    Interest expense 20,280 $
    EBT $300,000 $
    Taxes (40%) 120,000 $
    Net Income $180,000 $
    Dividends $ $
    Addition to RE $ $
    Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013
    2012 2013 Pro Forma
    Cash $180,000 $
    Accounts receivable 360,000 $
    Inventories 720,000 $
    Fixed assets 1,440,000 $
    Total assets $2,700,000 $
    Payables + accruals $540,000 $
    Short-term bank loans 56,000 $
    Total current liabilities $596,000 $
    Long-term bonds 100,000 $
    Total debt $696,000 $
    Common stock 1,800,000 $
    Retained earnings 204,000 $
    Total common equity $2,004,000 $
    Total liab. and equity $2,700,000 $

  3. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
    %

Thank you in advance for your help. If you will, please explain to me how you came up with the answer for "a". I wasn't sure where to look. I can see the differences in balance sheets.

Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data.

Balance Sheets 2013 2014

Assets

Cash $ 52,000 $ 57,600

Accounts receivable 402,000 351,200

Inventories 836,000 715,200

Total current assets $1,290,000 $1,124,000

Gross fixed assets 527,000 491,000

Less accumulated depreciation 166,200 146,200

Net fixed assets $ 360,800 $ 344,800

Total assets $1,650,800 $1,468,800

Liabilities and Equity

Accounts payable $ 175,200 $ 145,600

Notes payable 225,000 200,000

Accruals 140,000 136,000

Total current liabilities $ 540,200 $ 481,600

Long-term debt 424,612 323,432

Common stock (100,000 shares) 460,000 460,000

Retained earnings 225,988 203,768

Total equity $ 685,988 $ 663,768

Total liabilities and equity $1,650,800 $1,468,800

(continued)
Income Statements 2014 2013

Sales $3,850,000 $3,432,000

Cost of goods sold (3,250,000) (2,864,000)

Other expenses ( 430,300) ( 340,000)

Depreciation ( 20,000) ( 18,900)

Total operating costs $3,700,300 $3,222,900

EBIT $ 149,700 $ 209,100

Interest expense ( 76,000) ( 62,500)

EBT $ 73,700 $ 146,600

Taxes (40%) ( 29,480) ( 58,640)

Net income $ 44,220 $ 87,960

EPS $0.442 $0.880

Statement of Cash Flows (2014)

Operating Activities

Net income $ 44,220

Other additions (sources o f cash)

Depreciation 20,000

Increase in accounts payable 29,600

Increase in accruals 4,000

Subtractions (uses of cash)

Increases in accounts receivable ( 50,800)

Increase in inventories (120,800)

Net cash flow from operations $( 73,780)

Long-Term Investing Activities

Investment in fixed assets $( 36,000)

Financing Activities

Increase in notes payable $ 25,000

Increase in long-term debt 101,180

Payment of cash dividends ( 22,000)

Net cash flow from financing $104,180

Net reduction in cash account $( 5,600)

Cash at beginning of year 57,600

Cash at end of year $ 52,000

(continued)
Other Data 2014 2013

December 31 stock price $6.00 $8.50

Number of shares 100,000 100,000

Dividends per share $ 0.22 $0.22

Lease payments $40,000 $40,000

Industry average data for 2014:

Ratio Industry Average

Current 2.7x

Quick 1.0x

Inventory turnover 6.0x

Days sales outstanding (DSO) 32.0 days

Fixed assets turnover 10.7x

Total assets turnover 2.6x

Debt ratio 50.0%

TIE 2.5x

Fixed charge coverage 2.1x

Net profit margin 3.5%

ROA 9.1 %

ROE 18.2%

Price/earnings 14.2x

Market/book 1.4x

Assume that you are Donna Jamison’s assistant and that she has asked you to help her prepare a report that evaluates the company’s financial condition. Answer the following questions:

a. What can you conclude about the company’s financial condition from its statement of cash flows?

b. What is Computron’s inventory turnover, day’s sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firm’s utilization of assets stack up against that of the industry?

c. What are the firm’s debt, times-interest-earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?

d. Calculate and discuss the firm’s profitability ratios—that is, its net profit margin, return on assets (ROA), and return on equity (ROE).

e. WHAT ARE COMPUTRON’S INVENTORY TURNOVER, DAYS SALES OUTSTANDING, FIXED ASSETS TURNOVER, AND TOTAL ASSETS TURNOVER RATIOS? HOW DOES THE FIRM’S UTILIZATION OF ASSETS STACK UP AGAINST THAT OF THE INDUSTRY?