The balance sheet provides a snapshot of a firm’s financial position at a specific point in time, by using the company’s Asset and Debit Equity.
The Assets consists of: Current assets are highly liquid (cash, receivables, and inventories), Fixed assets can be capital-intensive assets which are permanent, and other assets can be intangible (patents, copyrights, and goodwill).
The Debt and equity consists of: Debt capital which are short-term debt (accounts payable, accrued expenses, and short-term notes) which is repaid within one year, while long-term debt (bank loans) is repaid over one year, and the owners' equity are the initial investment plus the firm’s retained income.
Situation 1
1. What did Donahoo’s balance sheet look like at the
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outset of the firm’s life? Change in Assets Balance Sheet Change in Date Assets Debt + Equity Debt + Equity 1-Jan Plus $1,500 Cash $1,500 Debt $ 500 Plus $500 Equity 1,000 Plus $1,000 Total $1,500 Total $1,500 2. What did the firm’s balance sheet look like after each transaction? Date Change in Assets Assets Debt + Equity Change in Debt + Equity 2-Jan Cash $1,000 Accts payable $ 500 Less $500 Inventory 1,000 Debt 500 Plus $500 Plus $1,000 Total $2,000 Equity 1,000 Total $2,000 Change in Assets Assets Debt + Equity Change in Debt + Equity 3-Jan Cash $1,000 Payables $ 500 Plus $250 Receivables 250 Debt 500 Less $200 Inventory 800 Equity 1,050 Plus $50 Plus $50 $2,050 $2,050 Date Change in Assets Assets Debt + Equity Change in Debt + Equity 15-Jan Cash $1,000 Payables $ 700 Receivables 250 Debt 500 Plus $200 Plus $200 Inventory 1,000 Equity 1,050 $2,250 $2,250 Change in Assets Assets Debt + Equity Change in Debt + Equity 31-Jan Cash sale: + $50 Payables $ 700 Reduce debt: -$250 Cash $ 700 Debt 250 Dividend: -$100 Equity 1,050 Plus $50 Total cash -$300 $2,000 Plus $450 Receivables 700 Less $400 Inventory 600 $2,000 3.
Ignoring taxes, determine how much income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1 percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed.
January 3 January 31 Jan 1 – Jan 31
Revenues $ 250 $ 500 $ 750
Cost of goods sold (200) (400) (600)
Gross profits/operating profits $ 50 $ 100 $ 150
Interest expense (1%/month) -- -- (5)
Net Income $ 50 $ 100 $ 145
4. What was Donahoo’s cash flow for the month of January?
Beginning cash (January 1) $ 1,500
Ending cash (January 31) 700
Net change in cash $ (800)
Free cash flow
Operating Perspective
Operating income $ 150
Depreciation Expense ---
EBITDA $
150 Change in current assets Cash $ (800) Accounts receivable 700 Inventory 600 Change in current assets $ 500 Change in accounts payable 700 Change in net working capital $ (200) Free cash flow (operating) $ 350 Free cash flows Financing perspective Dividends $ 100 Debt retirement 250 Interest expense $ 5 Change in accounts payable (5) Interest paid --- Free cash flow $ 350
As of December 26, 2004, our liquid assets totaled $10,924,000. These assets consisted of cash and cash equivalents in the amount of $10,642,000 and short-term investments in the amount of $282,000. The working capital deficit increased slightly from $50,359,000 as of December 28, 2003 to $51,041,000 as of December 26, 2004. This increase was due primarily to increases in the loss reserve and unearned premiums related to the captive insurance subsidiary and accounts payable and was partially offset by increases in inventories and receivables.
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
This company has a large amount of assets, they total out at about 124,213. They have more assets than actually cash on hand. This company has no short-term debt, the only debt they have is short-term. There is a section called other assets this, has increased by a lot. The fixed assets have increased by a lot in this company.
Equity capital represents money put up and owned by shareholders. This money can be used to fund projects and other opportunities under the auspice of creating greater value. This type of capital is typically the most expensive. In order to attract investors, the firms expected returns must consummate with the associated risk ("Financial leverage and,"). To illustrate this, consider a speculative oil drilling operation, this type of operation would require higher promised returns than say a Wal-Mart in order to attract investors. The two primary forms of equity capital are 1) money invested into the business for an ownership stake (i.e. stock) and 2) retained earnings from past profits used to fund future growth through acquisitions, expansions and product development.
To determine Panorama’s financial positions, we need to use ratio analysis. There are four main categories we can use. They are liquidity, activity, profitability, and debt or financial leverage.
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
In reviewing the company’s balance sheet, the current assets and liabilities were reviewed and liquidity ratios were calculated. The capital structure and the fixed and intangible asset accounting of the company were also reviewed. Off-balance sheet items such as leases and contingent liabilities were reported and noted. All of these aspects of the balance sheet were reviewed in order to do a proper analysis of the company’s balance sheet.
ABC LTD COMPREHENSIVE INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2012 NOTE 2012 Revenue 2 828,500 Cost of sales 3 (460,000) Gross profit 368,500 Other income 4 2,500 Operating expenses 5 361000 Profit before income tax 10000 Income tax expense (30%) 3,000 Profit for the year 7000 Other comprehensive income change in revaulation surplus 38500 Other comprehensive income for the year, net of tax 38500 Total comprehensive income for the year 45500 ABC LTD STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 30 JUNE 2012 NOTES 2012 ASSETS Current assets Cash and cash equivalents 6 100500 Trade and other receivables 7 45,200 Inventories 8 87700 Other current assets 9 7000
This means that the expenses from acquiring these resources are recorded as assets in the company’s balance sheet. The costs will then show on the balance sheet in the coming financial years through amortisation.
The main method used by businesses to classify assets is to split them into tangible assets, which have a separate existence from the business (examples of which would include buildings, land and machinery), and intangibles which do not. Some clear examples of intangibles include goodwill, patents, research and development expenditure and trademarks. Intangible assets are usually created within the organisation over a period of time, by the company itself, rather than acquired from an external source and are rarely sold off individually they can normally only be sold in conjunction with associated tangible assets.
Financial distress is often expressed as the force that drives most of the corporate decisions. However, many researches argue that there is weak comprehension of the duties of and connections between corporate illiquidity and insolvency; the most important two causes of financial distress.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
In the business world, companies finance their operations, both short-term and long-term, in the following three ways: debt financing, equity financing, or profit accumulation. Simply said, profits are generated by a company from within, but debt and equity are external, and both are controlled by managerial decree. When it comes to comparisons, debt and equity financing also provide the required amounts of business capital and both involve investors, but here, the similarities generally end. Going forward, the differences between debt and equity funding will be discussed.
There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
Schroeder et al (2011) stated that long term assets such as property, plant and equipment are assets not easily converted to cash and represents the main source of a firm’s future existence. ...