· 1 corporate financial reporting 8 - reporting working capital
Post on 19-Dec-2015
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WORKING CAPITALWhat is it?BALANCE SHEET
ASSETS LIABILITIES & OWNERS’ EQUITY LIABILITIES
CURRENT ASSETS CURRENT LIABILITIES
NONCURRENT ASSETS NONCURRENT LIABILITIES
OWNERS’ EQUITY
2Working Capital
WORKING CAPITALWhat’s included?
CURRENT ASSETS CURRENT LIABILITIES
Cash & Cash Equivalents Accounts payable Receivables Accrued liabilities Prepayments Notes & interest payable Inventory Deferred income taxes Marketable Securities Income taxes payable Deferred income taxes Warranty Liabilities
Restructuring Liabilities
3Working Capital
CURRENT ASSETSCash and cash equivalents:
Cash represents money immediately available to management to spend for “anything”; including foreign currency translated at the exchange rate on the balance sheet date.
Cash equivalents are short-term highly liquid investments that have these two characteristics: - readily convertible into known amounts of cash and - so near their maturity that there is insignificant risk of changes in value because of changes in interest rates.Generally, only investments with original maturities of three months or less meet the definition.
4Working Capital
CURRENT ASSETS
Prepayments: includes prepaid rent, insurance, magazine
subscriptions, salaries, etc.
Deferred Income Taxes: later (chapter 11)
Marketable Securities: later (chapter 12)
5Working Capital
CURRENT ASSETSINVENTORY
I. Acquisition Whose inventory is it? What is inventory’s cost?
II. Sale Perpetual vs. Periodic
III. Valuation (measurement) Cost flow assumption Lower of cost or market (LoCoM)
IV. Estimating inventory
6Working Capital
INVENTORY
What is Inventory’s Cost?
All costs of acquiring the inventory and getting it ready for sale.
8Working Capital
INVENTORY
What is Inventory’s Cost?OUR COMPANY BUILDS DESKS:
IN SEPTEMBER: CO. BUYS SOME LUMBER, COST $4,000
(enough for 80 DESKS)
CO. PAYS $100 DELIVERY CHARGE
9Working Capital
INVENTORY
What is Inventory’s Cost?OCTOBER: Employee starts work on ½ of the wood (40
desks). The company rents tools for $100/month. Employee uses $30 worth of sandpaper. Employee uses $40 worth of fasteners. Factory uses $200 of utilities. Administrative offices use $100 of utilities.
(continued)
10Working Capital
INVENTORY
What is Inventory’s Cost?OCTOBER: Employee uses $180 of finishing material. Depreciation of factory $400. Depreciation of administrative offices $150. Company pays factory employee $2,000. Company pays president $8,000. Company pays office staff $3,000. Employee finishes ½ of the desks (20 desks).
11Working Capital
INVENTORY
What is Inventory’s Cost?
NOVEMBER: Company sells 10 finished desks for $300
each.
12Working Capital
INVENTORY
Cost Flow Assumptions
Your new company does the following:Monday: buys 2 units @ $6/unitWednesday: buys 2 units @ $9/unitFriday: buys 2 units @ $12/unitSaturday: sells 4 units for $20/unit
Sunday you ask:What was my gross profit last week?How much is my inventory today?
14Working Capital
INVENTORY
Lower of Cost or Market (LoCoM or LCM)You are interested in investing in Company X that has the following on its latest financials:
Sales Revenue $1,200,000
Cost of goods sold exp. ( 400,000)
Gross profit $ 800,000
Inventory $ 20,000
For how much do you think they will sell their inventory?
15Working Capital
INVENTORY
Estimating InventoryToday your company’s warehouse burns down and your boss asks you to calculate the amount of inventory destroyed in the fire. You immediately call the accountant who says: “I don’t know - we use the periodic method. But, I can tell you this, sales so far this year are $210,000 and purchases were $46,000 - oh, and I’ll fax you last year’s income statement.”
16Working Capital
INVENTORY - Estimating InventoryLast Year’s Income Statement
Sales revenue $400,000
COGS expense:
Beginning inv. 10,000
Purchases 76,000
Goods avail. 86,000
Ending inv. ( 6,000)
Cost of goods sold ( 80,000)
Gross profit 320,000
Other expenses ( 200,000)
Income before taxes 120,000
Tax expense ( 36,000)
Net income $ 84,000
17Working Capital
CURRENT LIABILITIES
Accounts Payable: what company owes for unpaid inventory.
Accrued Liabilities: lots of things – wages, utilities, rent, etc.
Notes & Interest Payable: owes for money borrowed and interest on loans.
Income Taxes Payable: we know.Restructuring Liabilities: anticipated
costs.Warranty Liabilities: matching principle.
19Working Capital