CORPORATE FINANCIAL 8 Reporting Working Capital REPORTING 1

CORPORATE FINANCIAL 8 - Reporting Working Capital REPORTING · 1

WORKING CAPITAL What is it? BALANCE SHEET ASSETS CURRENT ASSETS NONCURRENT ASSETS LIABILITIES & OWNERS’ EQUITY LIABILITIES CURRENT LIABILITIES NONCURRENT LIABILITIES OWNERS’ EQUITY Working Capital 2

WORKING CAPITAL What’s included? CURRENT ASSETS CURRENT LIABILITIES Cash & Cash Equivalents Receivables Prepayments Inventory Marketable Securities Deferred income taxes Accounts payable Accrued liabilities Notes & interest payable Deferred income taxes Income taxes payable Warranty Liabilities Restructuring Liabilities Working Capital 3

CURRENT ASSETS Cash 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. Working Capital 4

CURRENT ASSETS Prepayments: includes prepaid rent, insurance, magazine subscriptions, salaries, etc. Deferred Income Taxes: later (chapter 11) Marketable Securities: later (chapter 12) Working Capital 5

CURRENT ASSETS INVENTORY 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 (Lo. Co. M) IV. Estimating inventory Working Capital 6

INVENTORY Whose Inventory is it? Our Supplier Our Company Working Capital 7

INVENTORY What is Inventory’s Cost? All costs of acquiring the inventory and getting it ready for sale. Working Capital 8

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 Working Capital 9

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) Working Capital 10

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). Working Capital 11

INVENTORY What is Inventory’s Cost? NOVEMBER: Company sells 10 finished desks for $300 each. Working Capital 12

INVENTORY Perpetual vs. Periodic Methods Working Capital 13

INVENTORY Cost Flow Assumptions Your new company does the following: Monday: buys 2 units @ $6/unit Wednesday: buys 2 units @ $9/unit Friday: buys 2 units @ $12/unit Saturday: sells 4 units for $20/unit Sunday you ask: What was my gross profit last week? How much is my inventory today? Working Capital 14

INVENTORY Lower of Cost or Market (Lo. Co. M 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? Working Capital 15

INVENTORY Estimating Inventory Today 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. ” Working Capital 16

INVENTORY - Estimating Inventory Last Year’s Income Statement Sales revenue COGS expense: Beginning inv. Purchases Goods avail. Ending inv. Cost of goods sold Gross profit Other expenses Income before taxes Tax expense Net income $400, 000 10, 000 76, 000 86, 000 ( 6, 000) ( 80, 000) 320, 000 ( 200, 000) 120, 000 ( 36, 000) $ 84, 000 Working Capital 17

INVENTORY Fairly Common “Trick” Managers Use Working Capital 18

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. Working Capital 19

WORKING CAPITAL ? Working Capital 20