...CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE and NOTES RECEIVABLE PROBLEM SOLUTIONS Assessing Your Recall Cash: Probable Future Value – The probable future value in cash is the ability of the cash to be exchanged for goods and services in the future. Ownership – Ownership is evidenced by possession of currency and by the right to control bank accounts. Temporary Investments: Probable Future Value - The probable future value in temporary investments is the cash payments that will be received from the investments in the future. These payments take the form of dividends in the case of shares and interest in the case of debt as well as the ultimate sales price of the securities when they are sold. Ownership – Ownership is evidenced by share or debt certificates although sometimes these documents are not distributed to the owners but a record is kept by the brokerage house that handles the investments for the company. Account Receivable: Probable Future Value – The probable future value in accounts receivable is that they represent the right to receive cash at some (usually fixed) date in the future. The cash, in turn, has value in the ability to be exchanged for goods and services in the future. Ownership – Ownership is evidenced by contracts either written or implied between the buyer and the seller. Invoices and shipping documents usually provide the necessary evidence of proof that a receivable exits. Notes Receivable: Probable Future Value – The...
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...age of inventory + average collection period = 110 days + 75 days = 185 days Cash conversion cycle = OC - average payment period (CCC) = 185 days - 30 days = 155 days Resources needed = cost of operating cycle investment x CCC 365 = $ 26,500,000 x 155 365 = $11,253,424.66 b. Industry OC = 83 days + 75 days = 158 days Industry CCC = 158 days - 39 days = 119 days Industry resources needed = $26,500,000 x 119 365 = $8,639,726.03 c. Casa de Diseno's cost of operational inefficiency : Needed resources $11,253,424.66 Less: needed industry resources $8,639,726.03 $2,613,698.63 x 15% $392,054.79 d. 1. Offering 3/10 net 60 : Average Collection period = 75 days x (100%-40%) (average collection could be reduced by 40%) = 45 days Operating cycle = 83 days + 45 days = 128 days Cash conversion cycle = 128 days - 29 days = 89 days Resources needed = $ 26,500,000 x 89 365 = $6,461,643.84 Additional saving = $2,178,082.19 = $326,712.33 2. Reduction in revenues as a result of the discount : = $40,000 x 45% x 3% = 540,000.00 3. Reduction in investment in accounts receivable and annual saving Average investment in accounts...
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...outflows within a year or less) * Cash = LT – debt + Equity + CL - CA other than cash – Fixed Assets ⇒activities that increase cash: 1. long term debt 2. equity (selling some stock) 3. CL 4. CA other than cash (selling some inventory for cash) 5. fixed assets (selling some property). * Activities that decrease cash (opposite of above) * Operating Cycle – the period between the acquisition of inventory and the collection of cash from receivables. 1. Inventory period – the time it takes to acquire and sell inventory. 2. Accounts receivable period – The time between sale of inventory and collection of receivables. (Operating cycle = Inventory Period + Accounts Receivable Period) * The operating cycle describes how a product moves through the CA accounts moving closer to cash. * Accounts Payable Period – The time btwn receipt of inventory & payment for it. *Cash Cycle – The time btwn cash disbursement and cash collection. The Cash Cycle is the number of days that pass before we collect the cash from a sale, measured from when we actually pay for the inventory. (Cash Cycle = Operating Cycle – Accounts Payable Period) * Cash Flow Timeline - A graphical representation of the operating cycle and the cash cycle. * The operating cycle is the period from inventory purchase until the receipt of cash. It may not include the time from placement of the order until arrival of the stock. The cash cycle is the period from when the cash is paid out to when the cash is received. * The gap btwn...
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...Less: Non-cash asset contributed at market value Land P 70,000 Building 90,000 Mortgage Payable ( 40,000) _120,000 Cash contribution P 80,000 1-5: d - Zero, because under the bonus method, a transfer of capital is only required. 1-6: b Reyes Santos Cash P200,000 P300,000 Inventory – 150,000 Building – 400,000 Equipment 150,000 Mortgage payable ________ ( 100,000) Net asset (capital) P350,000 P750,000 1-7: c AA BB CC Cash P 50,000 Property at Market Value P 80,000 Mortgage payable ( 35,000) Equipment at Market Value _______ _______ P55,000 Capital P 50,000 P 45,000 P55,000 2 Chapter 1 1-8: a PP RR SS Cash P 50,000 P 80,000 P 25,000 Computer at Market Value __25,000 _______ __60,000 Capital P 75,000 P 80,000 P 85,000 1-9: c Maria Nora Cash P 30,000 Merchandise inventory P 90,000 Computer equipment 160,000 Liability ( 60,000) Furniture and Fixtures 200,000 ________ Total contribution P230,000 P190,000 Total agreed capital (P230,000/40%) P575,000 Nora's interest ______60% Nora's agreed capital P345,000 Less: investment 190,000 Cash to be invested P155,000 1-10: d Roy Sam Tim Cash P140,000 – – Office Equipment – P220,000 – Note payable ________ _( 60,000)...
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...Solutions to Class 24 Manual HW Manual HW Day 24 1. A firm has estimated the following cash flows for a project: Year 0 -$100,000 Year 1 45,000 Year 2 52,000 Year 3 43,000 If the firm has a required rate of return of 20%, should this project be accepted? a. Calculate NPV b. Calculate IRR Cfo 100000 Enter ↓ C01 45000 Enter ↓ F01 1 Enter ↓ C02 52000 Enter ↓ F02 1 Enter ↓ C03 43000 Enter ↓ F03 1 Enter ↓ NPV 20 Enter ↓ CPT NPV -1,504.63 reject NPV<0 IRR CPT 19.03% reject IRR< RROR 2. For the project above, if the firm has a required payback of 3 years, should this project be accepted? Calculate the Payback Period Year Year 1 45,000 Year 2 45,000+ 52,000 = 97,000 Year 3 3,000/43,000 = 0.0698 Payback period = 2 + 0.0698 = 2.0698 accept, since payback period < 3 years 3.Two projects are mutually exclusive. Management has asked you to decide between them. Recommend which project should be accepted and why. Project A has a cost of $400,000 and has expected cash inflows of $75,000 for 10 years. Project B has a cost of $400,000 and has expected cash inflows of $90,000 for 7 years. The discount rate for both projects is 11%. Project A CF 2nd CLR WORK CF0 = 400,000 +/-enter ↓ C01=75,000 enter ↓ F01 = 10 enter ↓ NPV I = 11 enter ↓ CPT 41,692.40 Project B CF 2nd CLR Work CFo 4000000+/- Enter ↓ C01 90000 Enter ↓ F01 7 Enter ↓ NPV I = 11 Enter ↓ CPT 24,097.66 Select A higher NPV ...
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...Commission Expense | 150 | | | Investment Income/Loss | 500 | | | Investment in Company A | | $ 25,000 | | (Sold Company A shares) | | | | | Company B | | | Dec. 31 | Investment in Company B | 1,000 | | | Investment Income/Loss | | 1,000 | | (Fair Value-Carrying Value=$43,500-$42,500=$1,000) | | | | | Company C | | | Dec. 31 | Cash | 7,500 | | | Investment in Company C | | 500 | | Interest Income/Loss | | 7,000 | | (FV=150,000; PV=-151,500; N=3; PMT=7,500; I=4.6353% | | | | | Company D | | | Nov. 15 | Holding Loss on Company D | 5,000 | | | Investment in Company D | | 5,000 | | ($39,000-$44,000) | | | | | | | Nov. 15 | Cash | 38,770 | | | Commission Expense | 230 | | | Investment in Company D | | 39,000 | | (Sold 2,000 shares @$19.50 each=$39,000$39,000-$230brokerage fees=$38,770) | | | | | | | Nov. 15 | Loss on Sale of Company D | 1,700 | | | Holding Loss on Company D | | 1,700 | | ($5,000 loss-$3,300 gain=$1,700 loss) | | | | | | | Dec. 31 | Holding Loss on Company D | 7,200 | | | Investment in Company D | | 7,200 | | ( FV: 3,000shares@$19.6=$58,800 CV: 3,000shares@$22 =$66,000Loss =$7,200 Year end adjustment) | | | 2011 | | Company E | | | Feb. 15 | Investment in Company E | $ 3,080 | | | Holding Gain on Company E | | $ 3,080 | | (Adjust investment to the carrying valueSelling price$80...
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...contributed at market value Land P 70,000 Building 90,000 Mortgage Payable ( 40,000) _120,000 Cash contribution P 80,000 1-5: d - Zero, because under the bonus method, a transfer of capital is only required. 1-6: b Reyes Santos Cash P200,000 P300,000 Inventory – 150,000 Building – 400,000 Equipment 150,000 Mortgage payable ________ ( 100,000) Net asset (capital) P350,000 P750,000 1-7: c AA BB CC Cash P 50,000 Property at Market Value P 80,000 Mortgage payable ( 35,000) Equipment at Market Value _______ _______ P55,000 Capital P 50,000 P 45,000 P55,000 2 Chapter 1 1-8: a PP RR SS Cash P 50,000 P 80,000 P 25,000 Computer at Market Value __25,000 _______ __60,000 Capital P 75,000 P 80,000 P 85,000 1-9: c Maria Nora Cash P 30,000 Merchandise inventory P 90,000 Computer equipment 160,000 Liability ( 60,000) Furniture and Fixtures 200,000 ________ Total contribution P230,000 P190,000 Total agreed capital (P230,000/40%) P575,000 Nora's interest ______60% Nora's agreed capital P345,000 Less: investment 190,000 Cash to be invested P155,000 1-10: d Roy Sam Tim Cash...
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...U04a1 – UNIT 4 – INVESTMENTS IN INVENTORY AND ACCOUNTS RECEIVABLE – I. How Is Inventory Turnover Calculated? Inventory turnover ratio reflects how many times average inventory was produced and sold during the period (Libby et al). It means that it measures the number of times a company sells its inventory during the year. It is calculated using this formula: Inventory Turnover Ratio = Cost of goods sold (COGS). Average Inventory A high inventory turnover ratio indicated that the product is selling well. The product moves quickly through the production process to the ultimate customer, reducing storage and obsolescence costs. The inventory turnover ratio should be done by inventory categories or by individual product. Because less money is tied up in inventory, the excess can be invested to earn interest income or reduce borrowing, which reduces interest expense. II. Explain How Inventory Turnover Affects the Amount of Cash that must Be Invested in Inventory. Inventory Turnover affects the amount of cash invested in a company’s inventory because it is a measure of time and this can be in days. The longer the time (which causes lower turnover), that is how long it takes for the goods on average to sell and for cash from the sale to return to the business. For example, my sister in-law started a business, she made the mistake of buying too much inventory (supplies) for...
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...but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company’s market value. Question 3-3 Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than one year. The typical asset categories classified as current assets include: — Cash and cash equivalents — Short-term investments — Accounts receivable — Inventories — Prepaid expenses Question 3-4 Current liabilities are those obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities....
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...DE DISEÑO Find out more at www.kawsarbd1.weebly.com 372 Last saved and edited by Md.Kawsar Siddiqui Principles of Managerial Finance Solution Lawrence J. Gitman CHAPTER 14 Working Capital and Current Assets Management INSTRUCTOR’S RESOURCES Overview This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm's current asset accounts. The chapter then focuses on the management of three major current asset accounts⎯cash, accounts receivable and inventory. A brief discussion of general inventory management policies, international inventory management, and several specific inventory management techniques: ABC, economic order quantity (EOQ), reorder point, materials requirement planning (MRP), and just-in-time (JIT). The key aspects of accounts receivable management are discussed: credit policy, credit terms, and collection policy. The chapter also discusses the additional risk factors involved in managing international accounts receivable. Examples demonstrate the effect of changes in credit policy. Also discussed is the impact of changes in cash discounts PMF DISK This chapter's topics are not covered on the PMF Tutor or the PMF Problem-Solver. PMF Templates The following spreadsheet templates are provided: Problem 14-1 14-6 Topic Cash conversion cycle EOQ, reorder point, and safety stock 373 Part 5 Short-Term Financial Decisions Study Guide ...
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...Chapter 3 The Balance Sheet and Financial Disclosures AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e with the following AACSB learning skills: |Questions |AACSB Tags |Exercises (cont.) |AACSB Tags | |3–1 |Reflective thinking |3–3 |Reflective thinking | |3–2 |Reflective thinking |3–4 |Analytic | |3–3 |Reflective thinking |3–5 |Analytic | |3–4 |Reflective thinking |3–6 |Analytic | |3–5 |Reflective thinking |3–7 |Analytic | |3–6 |Reflective thinking ...
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...PAKISTAN Muhammad Ehsan Javaid Leghari PhD Management Sciences COMSATS Institute of Information Technology Islamabad, Pakistan Email:muhammadehsanjavaid@yahoo.com ABSTRACT Working capital management is necessary for profitability. In this study working capital management of sugar industry and its impact on profitability is checked from 2002 to 2012. Total observations are 308 while 28 companies listed at Karachi Stock Exchange are in sample. Correlation and pooled panel data regression analysis is performed. Results show that day’s inventory, cash conversion cycle, cash ratio, account receivable to sale ratio, short term investment ratio, secured short term obligation and fixed asset ratio are negatively affecting profitability of firm. Whereas quick ratio, days account receivable and working capital are positively affecting profitability. Key words: Return on Asset, Cash Conversion Cycle, Secured Short Term Obligations, Cash Ratio, Account Receivable to Sale INTRODUCTION In finance field two extensively examined areas are capital structure and working capital management. It is matter of great importance both for researchers and corporate individuals to figure out firm’s value and profitability. Working capital management has a direct impact on the firm profitability along with reducing the liquidity risk. Liquidity is one face of coin and profitability is other. It clarify that working capital management is directly proportional of firm profitability. US financial crises highlighted...
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...Accounting Information System Prepared for Arif Rana School of Business Prepared by Abdul Baten ID- 11315069 Poritos Chandra Day ID- 10315117 Farzana Arju ID- 11315115 Shohel Rana ID- 11315028 Nazrul Islam ID- 11315113 Asif Iqbal ID- 10315025 Farjana Ferdousi ID- 09515009 University of Information Technology and Sciences (UITS) 23rd December 2011 Table of Contents |Part |SL No. | |Page | | | |Introduction Of Company | | |A | | | | | | |Overview of the company | | | | |Products of the company | | | | | | | | | |What is AIS | | | | | ...
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...Financial Reporting and Analysis Chapter 4 Solutions Structure of the Balance Sheet and Statement of Cash Flows Exercises Exercises E4-1. Determining collections on account (AICPA adapted) Cash receipts from sales include cash sales plus collections on account computed as follows: Cash sales Beginning accounts receivable Credit sales Less: Ending accounts receivable Total Cash receipts from sales $ 200,000 400,000 3,000,000 __(485,000) $3,115,000 Alternative Solution: T-account analysis of accounts receivable Beginning balance Sales on account Ending balance Accounts Receivable $ 400,000 X Collections on account 3,000,000 $ 485,000 $485,000 = $400,000 + $3,000,000 – X X = $2,915,000 Total cash receipts from sales: Cash sales Collections on accounts receivable Total cash collected on sales $ 200,000 _2,915,000 $3,115,000 E4-2. Determining cash from operations (AICPA adapted) Cash flows from operations: Cash received from customers Rent received Taxes paid Cash paid to employees and suppliers Cash flows from operations $870,000 10,000 (110,000) (510,000) $260,000 Notice that cash dividends paid arises from the issuance of stock, a financing activity, and thus is not included in cash flows from operations. 4-1 E4-3. Determining cash collections on account (AICPA adapted) The provision for bad debts and write-off for uncollectible credit sales are non-cash expenses so they do not enter into the computation of cash receipts. To compute cash receipts, we need only sum the...
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...Secondary data from the Ghana Stock Exchange on manufacturing companies within the Accra metropolis was used to examine whether working capital management influence the profitability of manufacturing companies in the country. The study found out that, the major component of working capital management such as inventory days, account payable and cash conversion cycle have influence on the profitability of manufacturing companies. The study recommended that, manufacturing companies should adopt efficient and effective ways of efficiently managing these components of working capital management. KEY WORDS: Working capital management, profitability, net operating profit 1.1 INTRODUCTION Working Capital Management has become very important in financial management because of its effects on the firm’s profitability, risk and consequently its value. There are several important reasons why the management of working capital is important to both small and large organisations. (Smith, 1980). A well designed and implemented working capital management policy is expected to contribute positively to the creation of a firm’s value. (Padachi, 2010). Current assets of many companies, accounts for over half the total assets and are even higher in the companies in the distribution sector. (Horne and Wachowicz, 2009). However, a company is required to maintain a balance between liquidity and profitability while conducting it...
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