The first slides are about trade unions

• It is possible that there is a question in Paper 1 in October about trade unions

Who represents employees?

• A trade union (also known as a labour union in the UK) – an organization that works to protect the rights of the workers

• Idea is ¨strength in numbers¨ and also it s cheaper and quicker for one person, one small group to represent the many workers in the union

Trade Unions

• Members pay dues ($) – goes towards legal fees

Trade Unions

What do they want to get for their workers?

• Higher pay• Better working conditions• Better benefits• Better training• Better equipment

Working Captial and CF

• Liquidity – how easily an asset can be converted to cash (taking into consideration speed and if some of its value will be lost in the conversion)

• iIlliqud assets are things such as your building or raw materials

Importance of Liquidity

• Insufficient working capital is the single biggest cause of business failure (MORE THAN LOW PROFITABILITY)

• PHRASE FROM THE USA BUSINESS WORLD -

¨CASH IS KING¨ ……

Other Point - Should have sufficient liquidity, but not too much

• It is not the most efficient use of current assets to have too much of them, why?

• Because they can earn a higher rate of return being put in investments or to expand the business

Importance of Liquidity

• A lack of working capital can lead to insolvency (meaning that working capital is not sufficient to meet current liabilities – money owed to others, they are called creditors)

• This can lead to voluntary or compulsary closure of a business, and a liquidation of the company (SELLS ITS ASSETS IN ORDER TO TRY TO PAY AS MUCH OF THE MONEY IT CAN OF WHAT IT OWES)

Measure of Liquidity – Current Ratio

• The ratio compares the current assets with the value of current liabilities

Current Ratio

• Example: Current assets are $3 million and Current Liabilities are $2 million, then the current ratio is 1.5 to 1

• $3 million/$2 million = 1.5

• If the ratio is below 1.0, then the company has a liquidity problem and may not be able to meet its short term liabilities

Review of the Working Capital Cycle and Starting Cash Flow

• Working capital refers to the money that is available for the daily operation of the business (revenue expenditures, USA - called operating costs), opposite is capital expenditures, like a building or big Catepillar bulldozer

• Working capital is also known as net current assets and is calculated the following:

Working Capital = Current Assets – Current Liabilities

Working Capital

• Assets are items owned or owed to a company that have a monetary value, like a building it owns, all its machinery, its logo (of its brands), its inventory

Working Capital Cycle

Current Assets are the resources (or assets) held by a business that will be used in the next 12 months …..

Current Assets = Liquid Assets

Examples of Current Assets

• Cash can either be held at bank or in your hand (your wallet or in the cash register or safe a business (like a bank has)

• Should use cash efficiently (cash you do not need for the WC cycle, put into investments to earn more money)

Current Assets

• Other Current Assets:

• Investments (held in a safe for instance in a bank or placed in a bank account)

• Debtors (USA – accounts receivable)

• Stocks (USA – inventory)

Review - Current Assets• Debtors – money owed to the business by customers for goods

purchased on credit, MOST WHOLESALE TRANSACTIONS ARE ON CREDIT…

• ….FOR EXAMPLE WHEN SABMiller (WHICH SUPPLIES BRAHMA BEER TO Wong) SELLS THE BEER TO THE SUPERMARKET CHAIN, IT WOULD BE ON CREDIT, NOT PAID FOR WITH CASH)

• Stocks (inventory) – all the unsold products, but include raw materials, semi-finished goods, and finished goods

• Finished goods are liquid but the other two are not

Current Liabilities

• Current Liabilities refer to the money that a company needs to repay to others in the next 12 months, some examples are:

Current Liabilities

• Accounts Payable = trade credit = creditors, the financing of your purchase of raw materials or anything else you will later sell

Current Liabilities

• Overdrafts – from banks, very short term loans, with higher interest rates

• Or Taxes due, interest due, rent due, etc….

Current Assets and Current Liabilities

• Quiz yourself:

SABMiller has a __________(?), the money owed to it by Censosud, so it has a debtor or account receivable

Censosud has a _____________(?), the money it owes SAB Miller, so it has a creditor (account payable)

Putting together Current Assets and Current Liabilities….the Working Capital Cycle

• THE TIME BETWEEN THE CASH PAYMENTS FOR THE COSTS OF PRODUCTION AND RECEIVING MONEY FROM THE CUSTOMERS THAT BUY YOUR PRODUCTS

Cash Production Costs Sales Cash

---A company must manage the cycle well to make sure it can complete the circle

Why is WC important?

• Working Capital is essential for all parts of a company

• HR – you have to have sufficient WC to pay your employees or they will lose their trust in the company, lose motivation immediately!

• Marketing – This can only be funded if their is adequate CF. Sometimes companies use some of their cash cows to finance advertising of other, less profitable segments of the company

Another Practice Exercise

What is the working capital? Accounts Receivable $4,000Cash $70,000Inventory $50,000Overdrafts $25,000Accounts Payable $30,000Taxes owed $3,000

Answer $124,000 - $58,000 = $66,000

Forecasting Cash Flows

Important Point - there is a difference between profit and cash

• The profit of a company is sales (revenues) minus costs..

• …..but the cash is the net of cash inflows and cash outflows = net cash flow

Cash and Profit are Different Things

• SO….

IT IS POSSIBLE TO BE PROFITABLE BUT CASH DEFICIENT AND ITS ALSO POSSIBLE TO BE UNPROFITABLE BUT HAVE A LOT OF CASH

Forecasting Cash Flows

• Vs. Cash Flow Forecasts – A cash flow statement is a historical statement that shows the actual cash inflows and outflows of a company over a 12 month period

• A Cash Flow Forecast is an internal company document that shows the expected cash inflows and outflows over a period of time

Cash Flow Forecasts

• Cash Flow Forecasts have:

• Cash inflows (receipts) – mainly from the money you get from customers when they pay for your product, but also from things like:

debtor pays you, receipt of interest payments, sell your building, sell a subsidiary, win a lawsuit against another company, etc…

Cash Outflows

• Cash outflows can be from other sources too, like paying off accounts payable, long term debts, interest, or advertising expenses)….called payments and expenses

Net Cash Flow

• Is the difference between cash inflows and cash outflows

Reasons for Cash Flow Forecasts

• Banks and other lenders require cash flow forecasts to make decisions on a loan

• CF forecasts can help managers to anticipate and identify periods of potential cash difficulties – and may adjust the timing of cash inflows or cash outflows as a result

Cash Flow Forecasts

• CF forecasts help the planning process, and can be compared with actual results to plan better in the future

Constructing CF Forecasts

Month of JulyOpening Balance 5,000

Inflows Cash sales revenues 6,000Other income 0Total Cash Inflows 6,000

Constructing Cash Flows

OutflowsStocks 2,500Labor Costs 3,500Other costs 2,000Total Cash Outflows 8,000

Net Cash Flow (2,000)

Closing Balance 3,000

Complete Cash Flow ForecastOpening Balance 5,000

Inflows Cash sales revenues 6,000Other income 0Total Cash Inflows 6,000

OutflowsStocks 2,500Labor Costs 3,500Other costs 2,000Total Cash Outflows 8,000

Net Cash Flow (2,000)

Closing Balance 3,000

Constructing Cash Flows

Practice - January February

Cash sales 2,000 2,000 Stock purchases 600 60Rent 1,000 0Other costs 600 600Opening Cash Balance 1,000 ? Net Cash Flow ? 800Closing Cash Balance ? 1,600

Constructing Cash Flows

Practice - January February

Cash sales 2,000 2,000 Stock purchases 600 60Rent 1,000 0Other costs 600 600Opening Cash Balance 1,000 800Net Cash Flow (200) 800Closing Cash Balance 800 1,600

Causes of Cash Flow Problems

• Growing too fast - a company attempts to expand too quickly

• Overborrowing – Companies that are highly geared (USA term = highly leveraged) have high interest payments and possibly principal payments too

Causes of Cash Flow Problems

• Overstocking – Buy too much stocks (inventories)

• Poor Credit Control – Too many customers are buying on credit, or the credit terms are not strict enough, or customers are not paying in time

Causes of Cash Flow Problems

• Unforseen Changes - unexpected changes in demand (specific to the company or due to the economy) or a machinery breakdown lengthens the working capital cycle

Management of Cash Flow and Working Capital

• Dealing with Cash flow problems:

1. Seeking Alternative Forms of Finance (example, overdrafts)

2. Improving Cash Inflows (example, fewer days for ARs)

3. Reducing Cash Outflows (example, fire a redundant worker)

Other Alternative Forms of Finance• Overdrafts

• Sale and Leaseback

• Selling off Fixed Assets

• Debt factoring

• Government Assistance

• Growth strategies or Equity Infusion

Dealing With CF Problems Improving cash inflows…

• Tighter Credit Control (remember, this is how you are managing your debtors)

• Cash Payments Only (from customers, don´t even allow debtors!)

• Or find a way to increase sales…..examples?

Dealing With Liquidity Problems

• Change Pricing Policy (to get rid of excess inventory) – works for price elastic products

• Improved Marketing Planning – for example, through market research a company can improve its sales

Dealing With Liquidity Problems

Final Way to Deal with them – Reducing cash outflows

• Seek Preferential Credit Terms

• Seek Alternative Suppliers – raw materials at lower prices from different source

• Cut revenue expenditures – fire a redundant worker

Other ways

• Better Stock Control – Have raw materials ordered just before they are needed

• To repeat! Reduce Expenses! – examples are Airlines that stopped providing snacks or meals on many flights, or eliminating many unecessary perks for Senior Executives

Dealing With CF/WC/Liquidity Problems

• In the real world, companies use a combination of all three methods to deal with liquidity problems

Alternative Approach to Liquidity Problems

• Minimize the risks (being proactive)

• Wider consumer base (spreading the risks)• Send out demands for part-payments • Establish systems for large due amounts to be

paid in installments• Ensuring that quality management systems

are in place (for example, deliveries)

Limitations of Cash Flow Forecasting

• Marketing – Inaccurate or poor market research

• Human Resources – Unproductive workforce?

• Operations Management – Machinery failure? Airbus break-even point for Airbus production went up 70% because of production delays

• Competitors – Aggressive marketing by competiton (or superior products) can destroy your sales forecasts

Limitations of Cash Flow Forecasting

• Changing fashions and tastes – Causes changes in demand, some products will not sell, others may become unexpectedly popluar, etc..

• Economic changes – What stage in the economic cycle are we in? Consumer confidence is extremely important for consumer purchases Did we get an exogenous shock that threw us into a recession unexpectedly?

• External shocks - Did we get an exogenous shock that threw us into a recession unexpectedly?

Reminder: Profit vs. Cash flow

• Be aware of the trade offs between managing profitability and cash flow, sometimes they are at conflict

• Example – offering credit to low end customers

More tips about Cash Flow

Bank Interest

• If you start building your cash balance, then your money in the bank will start to pay you interest, helping your cash flow - virtuous circle

Bank Overdrafts

• Try to avoid this kind of short term financing, it costs the company (high interest rates) which hurts the cash flow - vicious circle

Reducing Expenses

• Remember, any reduction in expenses is the most direct and best way to help cash flow

• For example, having less workers, or paying them less, or re-negotiating your rent agreement, or renting less space to save on rent expense!

Management of Stocks (inventories)

• Do not buy more stocks than you need for your production, and do not pay cash for them, buy them on credit (using your accounts payable)

Taxes Owed

• You have to pay these amounts to the government

• But you can do it in payments (installments), you do not have to pay it all at once.

• By paying in installments you are delaying cash outflows, helping cash flow…..

Starting Cash Balance

• If you are starting a business and you start with too little cash you may be setting yourself up for failure in case in takes some time to build up cash flow…..

• Have enough capital to get you through the start up phase !

Something to Watch Out For – stop spending on inventory!

• A company´s sales start to decline, but it is still spending the same amount on stocks! This creates a cash flow problem

• This will lead to high cash outflow for payments and high accounts payable account that needs to be paid later

New Chapter -Accounting Fundamentals

• All companies must keep a record of their finances, including who owns everything (BS), how much was made or lost (IS), where the money went (CF)….etc…

Financial statements• A set of financial accounts consist of three statements

• INCOME STATEMENT (how much money made or lost)

• BALANCE SHEET (snapshot in time, assets liabilities and equity)

• CASH FLOW STATEMENT ( where are you getting cash from and what are you spending it on) vs. FORECAST, which we already learned about)

Financial Statements Paint a Picture

• And it is up to Financial Analysts, Investors, Shareholders to analyze them to see what they mean

• Remember, that trends are more important to look at than just one month or one year……

Financial Accounts, why have them?

• Companies must produce final accounts as an obligation (legal and owners)

• They are also vital for strategic planning

Imagine a company without them…

Management Accounting vs. Financial Accounting

• Management accounting is internal and confidential, it is what you will focus on if you are hired as an accountant in a company

• The rest of us focus on Financial Accounting (we are analyzing the final accounts that the company produced)

So who looks at Financial statements

• Shareholders

• Employees

• Managers

• Competitors

Who looks at Financial statements?

• Government

• Financiers

• Potential investors

Companies want them to look good

• As the book states, there is pressure on the company to make them look good……for almost all of the aforementioned groups

• Term from book – profit quality

• Later we will talk about ¨window dressing¨

Start with Income Statement• Top (1st) part of the income statement

• Sales = Revenues = Sales revenues = money received from customers for goods or services sold

• Gross Profit is the difference between the sales revenue and the cost of sales

Gross Profit

• Top (1st) part of the profit and loss account

• Sales = Revenues = Sales revenues = money received from customers for goods or services sold

• Gross Profit is the difference between the sales revenue and the cost of sales

Gross Profit

• Gross Profit = sales revenue – Cost of goods sold (COGS) = cost of sales

Sales revenue $50,000COGS ($45,000) Gross Profit $5,000

Cost of sales calculation

• Opening stock + purchases – closing stock

(book) $1,000 + $2,000 - $1,800 = $1,200 COGS If sales were $3,600, then gross profit = $2,400

or

$5,000 + $2,000 - $4,000 = $3,000 COGS

If sales were $10,000, then gross profit = $7,000

Calculate the gross profit – for a distributor of cocoa beans

• Beginning inventory: $10,000 (of cocoa beans)

• Purchases of cocoa beans: $33,000

• Ending inventory: $13,000

• Sales: $50,000

answer

• 10k + 33k – 13k = 30,000 (Cost of goods sold)

Sales 50,000COGS (30,000)GP 20,000

GROSS PROFIT MARGIN

Gross margin divided by sales

20,000 = 40%50,000

How to improve GP margin• Use cheaper suppliers

• Increase selling price

• Marketing strategies

• NOTE to AS Students- If they cut salaries, or lower rent, etc..those are NOT to do with GP….they are revenue expenditures (operating costs)….which we see next

Now, the full income statement• Operating profit =

gross profit – revenue expeditures (operating expenses)

• Examples of revenue expenditures:

administrative expenses… utility bills, interest on bank loans, rent, repairs, supplies, marketing expenses, all salaries and bonuses, transportation and distribution costs, etc…

To summarize

• GP minus (-) expenses = operating profit

• A company can try to increase operating profit by lowering expenses or from non-operating income

• for example, higher bank interest expense, or renting out one of their properties, or dividends received from investments……

So, after operating profit is…..

• Profit before taxes – taxes are then deducted to get Net Profit

Taxes

Taxes – what you owe to the government

--Usually it is converted to a liability on the Balance Sheet (unless you pay it all immediately)

Last Part of the Income Statement

• Final part is the Appropriation Account

• Shows how the net profit was distributed

It has two parts Dividends, and Retained Profit

Sample Income statement with the appropriation accountSales revenues $400,000Cost of Sales ($200,000)Gross Profit $200,000 Gross Profit Margin 50%

Less: Operating Expenses ($160,000)Operating Profit $40,000

Plus non-operating income $5,000Profit before interest and taxes $45,000

Interest Expense $1,500 Profit before taxes $43,500

Taxes ($3,500)Net Profit $40,000 Net Profit margin 10%

Dividends paid $ 2,000Ending Retained Profit $ 72,000 (beginning retained profit was $70,000)

Practice / calculate GP, GP margin operating profit and net income, net income margin and ending retained profits

• Beginning inventory $80,000• Purchases of stock $55,000• Ending inventory balance $10,000• Sales $160,000• Wages $12,000• Rent $4,000• Interest $4,000• Taxes $2,000 Non-operating income $2,500• Dividends $1,000 Beginning retained profit $345,000

Answer to 1st Practice

• In student notes

Practice Question 2 – 2011 and 2012 Income Statements

• Sales for 2011 were $35,000 per month for Jan to April,and $45,000 per month for May to December. Total sales increased 20% in 2012

• Gross margin is 70% for the whole year 2011. In 2012 COGS is 40%

• Operating expenses are 17% of total sales in 2011, but 22% of total sales in 2012

• There is $15,000 of non-operating income i 2011, and interest expense is $5,000 in 2011, but in 2012, there is $1,000 of non-operating income, and $14,000 of interest expense

• Tax rate is 25%, pay taxes on the amount of income before taxes , both years

• Dividends paid to shareholders in 2011: $3,000, in 2012 , are 0

• The retained profit balance at 12/31/10 was $100,000 (appropriation account!)

Analysis: What kind of story can you tell about this story for what happened in 2012 based on the results you see?

Income statement assessment• Sales for 2011 were $450,000. Total sales decreased 23% in 2012

• Gross margin is 60% for the whole year 2011. In 2012 Cost of sales is 55%

• Operating expenses are 17% of total sales in 2011, but 29% of total sales in 2012

• There is $13,000 of non-operating income in 2011, and interest expense is $5,000 in 2011, but in 2012, there is $1,000 of non-operating income, and $14,000 of interest expense

• Tax rate is 35%, pay taxes on the amount of income before taxes , both years

• Dividends paid to shareholders in 2011: $3,000, in 2012 , are $1,000

• The retained profit balance at 12/31/10 was $100,000 (appropriation account)

• Analyze what happened in 2012 based on the results you see, mention any ratios or increases or decreases from one year to the next

Income Statement Practice

2011 2012Sales Cost of Sales___________________________________ __ ____________ _ Gross Profit

GP Margin % %

Less: Operating Expenses __________________________ _______________ Operating Profit

Plus non-operating income__________________________ ______________ Profit before interest and taxes

Interest expense___________________________________ _______________ Earnings before taxes

Taxes ____________________________________________ _______________ Net Profit Net profit margin % %

Appropriation AccountBeginning Retained Profits+Net Income- Dividends paid = Ending Retained Profit

Do you pay taxes now?

Profit before Interest and Taxes $100,000Less (minus) Taxation $15,000Profit after tax $85,000

And on the Balance Sheet:Current Liabilities:Taxes Payable $15,000

Appropriation Account

• Dividends – is the amount of the net profit that is distributed back to the owners of the business (shareholders if it is a public company)

• The amount is converted to a liability on the balance sheet in current liabilties as dividends payable

Appropriation Account - Continued

• Retained profit – this is what is left from net profit after interest and tax, and after you have deducted the dividends.

• It is the money that the company will keep, and add to the balance sheet as added capital

Appropriation Account

So, the following IN GREEN will be seen in the the Consolidated Statement of Shareowners’ Equity

Net Profit after interest and tax $100,000Minus dividends $5,000= an amount that is left over….to go to retained profit

Appropriation Account

Retained Profit as of 12/31/10 $,5,500,000Retained profit for the year ended 12/31/11 $100,000New retained profit balance $5,600,000

Appropriation Account

The company has a reconciliation account for shareholder´s equity and it would show up there

It is called the Consolidated Statement of Shareowners’ Equity. (THIS WILL NOT BE A PART OF THE COURSE).

One other item in the Income statement

• Sometimes we see exceptional items (in USA callled extraordinary gain or loss)

• They are not expected to repeat, so they are put at the very bottom of the profit and loss account (to reflect that they are not a regular part of the operations of the company)

Example, exceptional item

Net profit after interest and tax $500,000Exceptional item – loss of building in hurricane $145,000Net profit and loss $355,000

Finishing thoughts on the income statement

• It shows historical performance

• There is no guarantee that this will be the performance in the future (that is the job of Analysts and investors to analyze what may happen in the future)

Finishing thoughts on the Income Statement

• Window dressing – legal manipulation of the P&L account or balance sheet to make it look better at year end

• Example: selling fixed assets on December 5th, and you receive the money December 30th,so that you show a large cash balance on December 31 (and show higher working capital and higher current ratio)

Balance Sheet• A ¨SNAPSHOT IN TIME¨ that shows everything

the company owns (its assets) and who it owes (its liabilities), and who owns the assets (equity, or capital).

Assets

• Assets are items owned by a business or owed to a business which hold a monetary value

• Assets are either current or fixed

Types of Assets

• Tangible fixed assets - physical assets such as equipment, machinery, property (land and buildings), trucks, etc..

• Tangible fixed assets will depreciate over time (THEY WILL LOSE THEIR VALUE AS THEY GET OLDER)

Types of Assets

• Intangible Fixed Assets – non-physical fixed assets such as brand names, trademarks, copyrights, and patents, and also goodwill

• Many times have very high value, but it is difficult process how to value them……

More on intangible assets• Patents – form of legal protection for inventors for a limited time, usually 20

years. So that company has exclusive rights to produce the product for that period, making its investment pay off(Example, compact discs were patented by Philips)

• Copyrights – legal protection to original artistic work (Example, you want to copy a Black Eyed Peas song, get permission from them first)

• Goodwill - value of an organization´s image, reputation, or its customer base, or even its employees´ loyalty to the company from having treated them well over the years.

• Registered Trademarks – distinctive signs that uniquely identifty a brand, Coca Cola brand image, the Nike swoosh, etc…

• Intellectual property - a term that often describes all of the above

Coca Cola´s Intangible Assets – but it is hard to measure these!

Value and their percent of Coca Cola´s total assets

IN BILLIONS OF $US DOLLARS Value of Assets Pct (%)

Goodwill $ 12,219 15%Bottlers’ franchise rights with indefinite lives $ 7,770 10%Trademarks with indefinite lives $ 6,430 8%Definite-lived intangible assets, net $1,137 1%Other intangible assets not subject to amortization $113 less than 1% Total $ 27,669 35%

When is the only time we can really put a dollar value on goodwill?

When there is a takeover (merger) and the cost of buying the target company (one being purchased) includes an extra amount ABOVE the value of its assets………that extra amount is the goodwill being paid….

More Types of Assets

• Investments – medium to long term financial investments that the company holds, they can be debentures (debt of other company or government) or shares in a company

• Can be held because they are profitable or as part of a joint venture, etc…

Total Assets

= current assets + long term assets

Liabilities

• A liability is a legal obligation of a business to repay its lenders or suppliers = debts

• For review! -- Current Liabilities are debts due within the next 12 months (as we learned in 3.3)

Liabilities

• Long term liabilities are debts that can be paid after 12 months.

• Examples include debentures (issued by the company), bank loans or mortgages

Equity

• This section, which appears at the bottom of the balance sheet, shows the ownership of the company

• It is broken down into sub-sections

Equity

• Shareholder´s Equity – is the amount of money raised through the sale of shares

+

• Retained Earnings (the profit the company has kept in the company)

Retained Profits

• Retained Profits – What is left over from the profit after interest and tax and dividends – this money is REINVESTED IN THE COMPANY, and adds to Equity

Simple Balance Sheet Cash 15 AP 15 AR 25 Inventory 40 10 yr. Bank loan 35 Building 20 Equity 50 Total Assets 100 Tot Liab´s + Equity 100 Total Assets = Total Liabilities + Equity

Note!

• USA puts current assets first

• UK (AS/CIE) put fixed assets first

• Important to know the US accounting (method), it is more universal

• For now, use US format

Use of Balance Sheets

• We can analyze working capital

• Asset structure (an increase in fixed assets may indicate they are expanding)

• Capital structure (leveraged or not leveraged, etc..), and

• Total assets (giving an idea of its size)

Limitations of Balance Sheets

• A balance sheet can change quickly

• Book value, which is what we mostly see on balance sheets for assets, can be very different than the true or market value of an asset

• No detailed breakdown of the assets

Limitations of Balance Sheets

• Intangible assets…..they are not really reflected

• Manchester United, a PLC, how can goodwill reflect the real value of each of the players (businessweek.com)

• Any company that says that its people are its most valuable asset might be having their balance sheet undervalue the company´s true value

One more ratio before Balance Sheet Practice

• Acid Test Ratio (also called Quick Ratio)

• Same as current ratio, but do not include inventory (stocks) because sometimes they are not so easy to sell

Acid ratio tells you how liquid the company is, only considering very liquid assets

Review

Liquidity RatiosCurrent Ratio, Acid Test Ratio

Profitability RatiosGross Margin, Net Profit margin

Balance Sheet Practice

Now, Practice - Create a balance sheet, also calculate the current ratio and acid test ratio

• Chevrolet 4 x 4 Trucks $121,000• Accounts Payable $35,000• Cash $15,000• Warehouse $664,000• Overdrafts $4,000• 20-year loan $100,000• Retained Earnings $203,000• Capital from issuance of shares $330,000• Accounts Receivable $54,000• 11-month Investment in CD $12,000• Inventory (stocks) $130,000• Taxes payable $11,000• Interest payable $13,000

Final Practice, Balance Sheet – Inka Food Supply Company

Create a balance sheet, also calculate the current ratio and acid test ratio

Capital from issuance of shares $212,000Overdrafts $2,000Warehouse $15,000Administration building $124,000Creditors $44,000Cash $15,0006-month loan $4,000Inka Food Supply 5% debentures, due 2032 $100,000Holdings of 20-year Chilean Government Bonds $142,000Retained Earnings $88,000Debtors $57,000Stocks $110,000Interest payable $15,000Short term investments $2,000

Answer Key – Inka Food Supply B/SCurrent Assets Current Liabilities Cash 15,000 Creditors 44,000Short term investments 2,000 Interest Payable 15,000 Debtors 57,000 Overdrafts 2,000 Stocks 110,00 Six-month loan 4,000Total Current Assets 184,000 Total Current Liabilities 65,000

Fixed (Long-Term Assets) Long-Term LiabilitiesWarehouse 15,000 20-year debentures $100,000 Administration building 124,000 Total Long-Term Liabilties $100,00020-year Chilean Bonds 142,000Total Long-term Assets 281,000 Shareholder´s Equity Capital Stock issued 212,000 Retained Earnings 88,000 Total Shareholder´s Equity 300,000 TOTAL ASSETS $465,000 TOTAL LIABILITIES AND SHAREHOLDER´s EQUITY $465,000

Current Ratio 2.83Acid Test Ratio 1.13

The company has good liquidity as evidenced by the almost 3x current ratio and Acid test ratio above 1x

Fedex example

• Non-operating income – gambling?

• If it is true, founder Smith had only $5,000 left and flew to Las Vegas and turned it into $32,000 and kept the company running long enough to get an $11 million investment

IBM´s capital structure

• http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=ibm