...backs all of its securities, guaranteeing full payment at maturity dates; therefore, the more the government sells securities today, the more its future obligation to pay off the holders. Some believe that the increased future liability of the US due to the sale of securities (again, known as public debt) can be detrimental to the economy as it puts ever increasing pressure on the future generations to make good on the payments. For example, if you buy a 30-year Treasury bond today, the obligation to pay you in 30 years will fall on the taxpayers or investors of that time, many of whom have not even been born yet. For now government securities are one of the most secure investments one can make. They are considered secure because the general belief is that the issuing government (in our case the US) will continue to have a prosperous economy way into the future therefore having virtually no risk of defaulting on payments. In fact, they are considered so safe that many foreign governments use such securities to back their economies. Recently an Australian bank replaced a large portion of its holdings in gold with bonds issued by the governments of the USA, Japan, and Germany. This confirms the genuine trust that has been placed on government securities and why they are such powerful instruments of the economy. Types Of Government Securities The US government issues several types of securities to raise money for its operations. Again, all of these securities are backed by the...
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...installment payable on March 1, 2017. | d. | Accrued interest payable of $12,000 related to the note payable. | e. | Investment in marketable securities of other corporations, $80,000. Cone intends to sell one-half of the securities in 2017. | 1. Cash restricted, so you save it and can’t use it. So it goes under investments for that amount to be used to pay your bonds payable. 2. Prepaid rent of $24000, covering the period January 1, 2017, through December 31, 2018. -Your current prepaid rent is split into 2 years, one current year and the year following. Divide 24k by 2, and your Current Asset in (BS) is for Prepaid Rent of 12,000 the other 12,000 goes under Other Assets for Prepaid Rent 3. 20,000 per year, so Current Liab: Current Maturity of Long Term Debt is 20,000. Also Note Payable is 200,000 but after the first year you paid 20,000. So you are left with LongTermLiabiligy: Note Payable: 200,000-(first year pmt of 20,000)= 180k left to pay. 4. Goes down under Current Liability: Interest Payable of 12,000 related to the note payable. 5. 80k, Invested into Marketable Security of another corporation, intend to sell half in 2017, so that is $40,000 of Current Assets of Marketable Security. Other half $40,000 will go under Investment since you invested in Marketable Security. Question 10 Disclosures: Common examples of disclosures...
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...using the Lotus model, use it to complete the tables. Be sure you understand all the numbers, as it would be most embarrassing if you were asked how you got a particular number, and could not give a meaningful response. 2. Based on the information in the case and on the results of your calculations in Question 1. prepare a list of Garden State’s strengths and weaknesses. In essence, you should look at the commonsized statements and each group of key ratios (for example, the liquidity ratios) and see what those ratios indicate about the company’s operations and financial condition. As part of your answer, use the extended Du Pont equation to highlight the key relationships. 3. Recognizing that you might want to revive your opinion later, does it appear, based on your analysis to this point, that the bank should lend the requested money to Garden State? Explain. Table 3 CommonSized Balance Sheets for Years Ended December 31 1990 1991 1992 Assets: Cash and marketable securities Accounts receivable Inventory 8.82% 5.13% 30.39 35. 36 3.37 % 30.9 1 50.3 9 83.9 5 22.9 3 6.88 16.0 5% 100. 00% 25.72 48.32 Current Assets Land, buildings, plant, and equipment 74.55% 79.18% 30.78% 27.31% Accumulated depreciation 5.32% 6.48% Net fixed assets 25.45% 20.82% Total assets 100.00% 100.00% Table 4 CommonSize Income Statements for Years Ended December 31 1990 1991 Net sales ...
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...indirectly contribute to the country's productive capacity. C. contribute to the country's productive capacity both directly and indirectly. D. do not contribute to the country's productive capacity either directly or indirectly. E. are of no value to anyone. 7. In 2012, ____________ was the most significant real asset of U.S. households in terms of total value. A. consumer durables B. automobiles C. real estate D. mutual fund shares E. bank loans 8. In 2012, ____________ was the least significant financial asset of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves 9. In 2012, ____________ was the most significant financial asset of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves 10. In 2012,...
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...Current assets are cash and other resources such as supplies or retail items that should be used during a business year or a company’s operating cycle which is the case with seasonal businesses such as beach stores and ski lodges. Current assets are part of the balance sheet that equals the sum of cash and things that can be considered cash such as: accounts receivable, inventory, marketable securities, prepaid expenses, stocks, bonds, etc. These all can be considered a current asset because they can be converted into cash in less than one business year. Creditors take into account a company’s current assets to ensure extending credit to the company is a smart business move on their end. Since these assets can be easily liquidated in case the company is forced into bankruptcy or worse going out of business. Current assets are defined as a “balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.” (Investopedia, 2012) Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. Current assets are important to companies for day-to-day operations. Without strong current assets a business can run into cash flow problems which only cause more problems. This is the reason why assets are so important to a business. As long as a business can show that it has current assets creditors...
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...estimate asset investment requirements for a corporation. Explain the concept of working capital management. Identify and briefly describe several financial instruments that are used as marketable securities to park excess cash. A corporation having a financial plan in place to estimate its assets investment requirement is important. It’s important because their assets can be used as an advantage for securing loans and can be used to calculate their ability to repay debts. A corporation’s sales are a key compelling force of future asset requirements. As sales steadily increase it creates a need for increase in assets. In other words, asset needs have a propensity to stem from sales increases. For example, if you were to estimate that sales for a corporation will be $40million for a given year, and it is know that in that specific industry that assets have a propensity to be about 40% of sales, then you could estimate that the corporation’s asset requirement will be $16million (40% x $40,000,000). Another good way to estimate asset requirements is to use the percentage-of-sales technique, which is a technique use for forecasting financial data. “Working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors, and inventories (Sabharwal, 2009).” Working capital is the remaining of current assets less current liabilities. It is the funds used to operate a business on a daily basis...
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...Solutions for Chapter 12 Audit of Cash and Other Liquid Assets Review Questions: 12-1. It is important that cash and liquid asset testing be coordinated because the assets can be quickly moved and thus substituted for each other. For example, an organization could quickly move assets between cash and certificates of deposit. 12-2. General Cash Account. This is the account used to transact most of the organization's cash transactions. It is usually a high volume, but low balance account. Because of its high volume and its liquidity it is susceptible to greater risk than most asset accounts of the same size. Imprest Payroll Account. This is an account that is maintained strictly for the payment of payroll. The organization makes a deposit equal to the monthly or weekly payroll at the time the payroll checks or electronic transfers are issued. The account is used to minimize accounting costs and to isolate payroll risks to one account. 12-3. We disagree with the auditor's assessment of inherent risk of cash transactions as low. Granted, the accounting for cash and marketable securities is not overly complex. However, the liquidity of the accounts, coupled with their susceptibility to fraud or misappropriation, makes the inherent risk of the accounts at least moderate - if not high. Most organizations recognize the high inherent risk associated with the accounts and have implemented detailed control procedures to reduce control risk to a minimal level. 12-4...
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...Cash and Marketable Securities | 18.9 | 102.7 | 132.5 | 183.2 | 300.8 | Stockholders' Equity | 54.5 | 139.3 | 239.1 | 375.5 | 561.7 | Net Profit | 24.1 | 39.3 | 71.8 | 123.9 | 170.5 | ROE | 44.22% | 28.21% | 30.03% | 33.00% | 30.35% | New Cash and Marketable Securities | 2.8 | 4.1 | 9.3 | 18.6 | 25.2 | New Stockholders' Equity | 38.4 | 40.7 | 115.9 | 210.9 | 286.1 | New Net Profit | 23.5 | 37.4 | 67.5 | 118 | 157.7 | ROE (after adjusted) | 61.20% | 91.89% | 58.24% | 55.95% | 55.12% | Increased ratio | 38.39% | 225.71% | 93.94% | 69.57% | 81.59% | | 1990 | 1991 | 1992 | 1993 | 1994 | Cash and Marketable Securities | 449 | 686 | 1345 | 2290 | 3614 | Stockholders' Equity | 919 | 1351 | 2193 | 3242 | 4450 | Net Profit | 279 | 463 | 708 | 953 | 1146 | ROE | 30.36% | 34.27% | 32.28% | 29.40% | 25.75% | New Cash and Marketable Securities | 39 | 57 | 78 | 91 | 105 | New Stockholders' Equity | 509 | 722 | 926 | 1043 | 941 | New Net Profit | 256 | 434 | 669 | 897 | 1077 | ROE (after adjusted) | 50.29% | 60.11% | 72.25% | 86.00% | 114.45% | Increased ratio | 65.67% | 75.40% | 123.78% | 192.57% | 344.43% | From the case, we can know that Microsoft outsold its nearest competitor several time to be the most profitable large public corporation in the world, and dominated two critical segments of the personal computer market, operating system and applications software. From the charts, we can find that when we take the excess cash and marketable securities...
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...of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves See Table 1.1. Difficulty: Easy 3. In 2007, ____________ was the most significant asset of U.S. households in terms of total value. A. real estate B. mutual fund shares C. debt securities D. life insurance reserves E. pension reserves See Table 1.1. Difficulty: Easy 4. In 2007, ____________ was the most significant liability of U.S. households in terms of total value. A. credit cards B. mortgages C. bank loans D. student loans E. other debt See Table 1.1. Difficulty: Easy 5. The largest component of domestic net worth in 2007 was ____________. A. non-residential real estate B. residential real estate C. inventories D. consumer durables E. equipment and software See Table 1.2. Difficulty: Moderate 6. In 2007, ____________ was the most significant real asset of U.S. nonfinancial businesses in terms of total value. A. equipment and software B. inventory C. real estate D. trade credit E. marketable securities See Table 1.4. Difficulty: Easy 7. In 2007, ____________ was the least significant real asset of U.S. nonfinancial businesses in terms of total value. A. equipment and software B. inventory C. real estate D. trade credit E. marketable securities See Table 1.4. Difficulty: Easy 8. In 2007, ____________ was the least significant...
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...contribution, though not optimal contribution to profitability with out impairing the liquidity of the firm. * It is followed by the firms which cannot devote enough time and resources to management of securities. * 3. Ride on yield curve: this is a strategy to increase the yield from a portfolio of marketable securities by betting on the interest rate changes. * If the financial manager expects that interest rates will fall in the near future, he would buy longer term securities as they appreciate more, compared to shorter term securities. * On the other hand , if the FM believes that the interest rates will rise in the near future, he would sell longer term securities. This strategy hinges on the assumption that the FM has superior interest rate forecasting ability. * Empherical evidence, however suggests that it may be futile to try to do better than average. The expected higher return is almost invariably accompanied by higher risk. * 4. Develop guidelines: a firm may develop a set of guidelines which may reflect the view of the management toward risk and returns. * 1. do not speculate on interest rate changes. * 2. hold marketable securities till they mature. * 3. do not put more than a certain percentage of liquid funds in a particular security or instruments. * 4. minimize transaction...
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... E) marketable securities Answer: C Difficulty: Easy Rationale: See Table 1.4. 2. In 2005, ____________ was the least significant real asset of U. S. nonfinancial businesses in terms of total value. A) equipment and software B) inventory C) real estate D) trade credit E) marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4. 3. In 2005, ____________ was the least significant liability of U. S. nonfinancial businesses in terms of total value. A) bonds and mortgatges B) bank loans C) inventories D) trade debt E) marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4. 4. In 2005, ____________ was the most significant financial asset of U. S. nonfinancial businesses in terms of total value. A) cash B) trade credit C) trade debt D) inventory E) marketable securities Answer: B Difficulty: Easy Rationale: See Table 1.4. 5. The material wealth of a society is equal to the sum of _________. A) all financial assets B) all real assets C) all financial and real assets D) all physical assets E) none of the above Answer: B Difficulty: Easy Rationale: Financial assets do not directly contribute the productive capacity of the economy. 6. ____________ of an investment bank. A) Citigroup is an example B) Merrill Lynch is an example C) Goldman is an example D)...
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...personal devices. Assets and Liabilities of Apple The four different types of assets are Current Assets, Long-Term Assets, PPE (Property, Plant & Equipment), and Intangible Assets. Team B’s task was to define current assets. A current asset is an asset which can either be converted to cash or used to pay current liabilities within one year. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, stock inventory and the portion of prepaid liabilities which will be paid within the year. Current assets are presented in the order of liquidity, example; cash, temporary investments, accounts receivable, inventory, supplies, prepaid insurance (Accountingbase.com, 2009). Team B was also asked to determine if Apple’s current assets are listed in the proper order. Apple lists its current assets in this order: cash and cash equivalents, short term marketable securities, accounts receivable, inventories, deferred tax assets, vendor receivables, other miscellaneous assets. Generally Accepted Accounting Principles (GAAP) require that assets are listed in order of liquidity. The order in which assets are listed will vary from company to company. Team B has determined that Apple lists its assets in the correct order. Cash Equivalents Cash equivalents are classified as current assets on the balance sheet. Typically companies will invest any excess cash into cash equivalents. Companies purchase short-term investments such as money market holdings, Treasury...
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..._________ but are not _________.| A)|negotiable; liquid.| B)|marketable; liquid.| C)|liquid; personal| D)|liquid; marketable| Ans:|D| 4.|Series EE bonds must be held at least ______ years in order to receive the guaranteed minimum rate.| A)|3| B)|5| C)|8| D)|10| Ans:|B| 5.|Treasury bills are traded in the _____________________.| A)|money market.| B)|capital market.| C)|government market.| D)|regulated market.| Ans:|A| 6.|Which of the U.S. Treasury securities is always sold at a discount?| A)|Treasury bills| B)|Treasury notes| C)|Treasury bonds| D)|All of the Treasury securities are sold at a discount.| Ans:|A| 7.|Which of the following statements regarding money market instruments is not true?| A)|They tend to be highly marketable.| B)|They tend to require a small dollar investment.| C)|They tend to have a low probability of default.| D)|Their rates tend to move together.| Ans:|B| 8.|Which of the following would not be considered a capital market security?| A)|a 20-year corporate bond| B)|a common stock| C)|a 6-month Treasury bill| D)|a mutual fund share| Ans:|C| 9.|The coupon rate is another name for the:| A)|market interest rate.| B)|current yield.| C)|stated interest rate.| D)|yield to maturity| Ans:|C| 10.|Zero-coupon bonds are similar to Treasury bills in that both:| A)|are issued exclusively by the U.S. Treasury.| B)|are money-market securities.| C)|are capital-market...
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...Opportunity Costs Trading costs C* 2 Size of cash balance 3 The Baumol Model – Opportunity Cost F = The fixed cost of selling securities to raise cash T = The total amount of new cash needed K = The opportunity cost of holding cash: this is the interest rate. The Baumol Model – Trading Cost F = The fixed cost of selling securities to raise cash T = The total amount of new cash needed K = The opportunity cost of holding cash: this is the interest rate. C C 2 The opportunity cost of holding C is C × K 2 2 C The trading cost is C 2 T ×F C 1 2 3 Time 4 1 2 3 Time 5 1 The Baumol Model The Baumol Model Total cost = C T × K + ×F 2 C Opportunity Costs The optimal cash balance is found where the opportunity costs equals the trading costs C ×K 2 Opportunity Costs = Trading Costs C T × K = ×F 2 C Trading costs C* Size of cash balance The optimal cash balance is found where the opportunity costs equals the trading costs T ×F C Multiply both sides by C C2 ×K =T×F 2 C 2 = 2× T ×F K C* = 2T ×F K C* = 6 2TF K 7 Baumol Model Example l C* = 2TF K The Miller-Orr Model l l Assume Stetson Corp. has fixed costs of selling securities of $800, cash outflows exceed inflows by $50,000 per week, and the interest rate on marketable securities is 8%....
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...Cash Management Comparison Many organizations make a financial goal to minimize the amount of cash on hand on a monthly basis. This goal is based on attempting to reduce the amount of non-earning assets for the company. Cash on hand that is not required to meet a specific need could be placed in an interest bearing account or used to pay down on a credit balance, also reducing the amount of interest a company would have to pay on a loan. “Minimizing cash balances as well as having accurate knowledge of when cash moves into and out of the company can improve overall corporate profitability.” (Block & Hirt, 2004, pg. 175). As companies find a need to supplement business financial goals, obtaining credit or loans on a short-term basis is very attractive. Several options exist that organizations can explore when seeking short-term financing and each has an advantage or disadvantage over the other, based on the objectives the funds will be used for and or the length the funds will be borrowed. Cash Management Techniques “Cash flow relies on the payment pattern of customers, the speed at which suppliers and creditors process checks, and the efficiency of the banking system. The primary consideration in managing the cash flow cycle is to ensure that inflows and outflows of cash are properly synchronized for transaction purposes.” (Block & Hirt, 2004, pg. 175) When a company has positive control of the flow cash on a monthly basis the ability to determine the on hand cash requirements...
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