1 / 13

Assignment Review Lecture 7

Assignment Review Lecture 7 Current Asset Mgmnt & Financing Analyzing Financial Performance (Gapenski Chapters 16 & 17) The “costs” of assets All assets have costs… Assets are financed by equity and liability: the fundamental accounting equation The concept of an opportunity cost

Donna
Télécharger la présentation

Assignment Review Lecture 7

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Assignment ReviewLecture 7 Current Asset Mgmnt & Financing Analyzing Financial Performance (Gapenski Chapters 16 & 17)

  2. The “costs” of assets • All assets have costs… • Assets are financed by equity and liability: the fundamental accounting equation • The concept of an opportunity cost • Fixed assets… • Acquisition funded by loans or equity • But also incur a “carrying cost”… time value effect – also funded by loans or equity

  3. Current asset (CA) costs • CA are also financed by equity/ liability: • Cash and marketable securities • Accounts receivable • Inventories • Difference between earning (marketable securities) and unearning (A/R, inventories) CA. • A/R can be factored • Inventories can be sold at discount…

  4. Optimizing CA • Rule is to keep CA to minimum possible without incurring > costs • A/R depends on trade credit offered – affected by customer demands and industry practice. • Inventory levels affected by: • Operating levels (e.g. process industries vs. hospitals) are “permanent” CA • “Safety stocks” and seasonal stock are “temporary” current assets

  5. Financing CA policies • Maturity matching – “moderate” • Permanent assets with equity and LT debt • Seasonal assets with ST debt • Conservative – equity and LT debt funds permanent assets and part of seasonal assets • Aggressive – ST borrowings fund seasonal and part of permanent assets Why would you select each?

  6. Cash management • Collect quickly/ disburse (pay) slowly • Collection: variety of methods get collections into cash, thence into earning assets: lockbox services, concentration banks, electronic funds transfer and automated clearinghouses • Disbursement: payables management, ZBAs at concentration banks, remote disbursement

  7. Receivables management • Cost of carrying A/R is a function of: • average collection period (ACP) aka Days Sales Outsanding (DSO) • average $sales/day • cost of financing • ACP depends on credit terms offered/ nature of the business • Reducing ACP generates a reduction in carrying cost and a one-time infusion of cash • “Aging schedules” can point to problems • HC providers face complexities other sectors do not

  8. Sources of short term financing • Accrued expenses: • “free money” • Spontaneous • Accounts payable: • Free trade credit – pay w/in discount period • Costly trade credit – pay outside time Ethical issues with: paying late and taking discount; or with “stretching” • Bank financing: short term loans, revolving credits, etc.

  9. Analyzing financial performance(Chapter 17) Statement of cash flows – How was cash generated? • Operating activities – core to business • Investing activities – generally, purchases/ sales of fixed assets • Financing – ST / LT securities as investments and as liabilities

  10. Ratio analysis • Common approaches, but values are industry-specific • Net income as numerator: • Total margin -- NI/ revenues • ROA -- NI/ total assets • ROE -- NI/ equity Would you expect the ROA to be higher/ lower than the ROE? Why?

  11. Liquidity ratios • Current ratio – CA/ CL • “Acid test” – remove inventories from CA • Some industries function with relatively high inventories • Days cash on hand: can a business meet its payments…an operational view

  12. Debt Management Ratios • Capitalization ratios – balance sheet data focusing on debt leverage • Debt/ equity • Debt/ assets • Coverage ratios – income statement data indicating whether net income can “cover” debt requirements • TIE ratio (times interest earned) = EBIT/ Interest exp Complementary, but capitalization ratios are point in time…

  13. DuPont Analysis ROE = Total margin x Total asset turnover x Equity multiplier NI/ Equity = NI/ Rev x Rev/ assets x Assets/ equity Total margin: expense control Total asset turnover: asset utilizationEquity multiplier: debt utilization

More Related