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CORPORATE FINANCIAL REPORTING

8 - Reporting Working Capital. CORPORATE FINANCIAL REPORTING. W ORKING C APITAL What is it?. BALANCE SHEET ASSETS LIABILITIES & OWNERS’ EQUITY LIABILITIES CURRENT ASSETS CURRENT LIABILITIES NONCURRENT ASSETS NONCURRENT LIABILITIES

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CORPORATE FINANCIAL REPORTING

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  1. 8 - Reporting Working Capital CORPORATE FINANCIAL REPORTING

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

  3. WORKING CAPITALWhat’s included? CURRENT ASSETSCURRENT LIABILITIES Cash & Cash EquivalentsAccounts payable Receivables Accrued liabilities PrepaymentsNotes & interest payable InventoryDeferred income taxes Marketable SecuritiesIncome taxes payable Deferred income taxesWarranty Liabilities Restructuring Liabilities Working Capital

  4. 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. Working Capital

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

  6. 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 Working Capital

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

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

  9. OUR COMPANY BUILDS DESKS: IN SEPTEMBER: CO. BUYS SOME LUMBER, COST $4,000 (enough for 80 DESKS) CO. PAYS $100 DELIVERY CHARGE INVENTORY What is Inventory’s Cost? Working Capital

  10. 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) INVENTORY What is Inventory’s Cost? Working Capital

  11. 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). INVENTORY What is Inventory’s Cost? Working Capital

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

  13. INVENTORY Perpetual vs. Periodic Methods Working Capital

  14. 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? INVENTORY Cost Flow Assumptions Working Capital

  15. 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? INVENTORY Lower of Cost or Market (LoCoM or LCM) Working Capital

  16. 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.” INVENTORY Estimating Inventory Working Capital

  17. 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 INVENTORY - Estimating Inventory Last Year’s Income Statement Working Capital

  18. INVENTORY Fairly Common “Trick” Managers Use Working Capital

  19. 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. CURRENT LIABILITIES Working Capital

  20. ? WORKING CAPITAL Working Capital

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