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A Studocu não é patrocinada ou endossada por alguma faculdade ou universidade Casos Práticos Resolvidos - Análise e Planeamento Financeiro Análise e Planeamento Financeiro (Universidade do Minho) A Studocu não é patrocinada ou endossada por alguma faculdade ou universidade Casos Práticos Resolvidos - Análise e Planeamento Financeiro Análise e Planeamento Financeiro (Universidade do Minho) Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 https://www.studocu.com/pt?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro https://www.studocu.com/pt/document/universidade-do-minho/analise-e-planeamento-financeiro/casos-praticos-resolvidos-analise-e-planeamento-financeiro/13191487?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro https://www.studocu.com/pt/course/universidade-do-minho/analise-e-planeamento-financeiro/2874269?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro https://www.studocu.com/pt?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro https://www.studocu.com/pt/document/universidade-do-minho/analise-e-planeamento-financeiro/casos-praticos-resolvidos-analise-e-planeamento-financeiro/13191487?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro https://www.studocu.com/pt/course/universidade-do-minho/analise-e-planeamento-financeiro/2874269?utm_campaign=shared-document&utm_source=studocu-document&utm_medium=social_sharing&utm_content=casos-praticos-resolvidos-analise-e-planeamento-financeiro 1 1.1. Relevance of Financial Analysis 1.1. Relevance of Financial Analysis 1.1.1. Introduction to financial analysis 1.1.2. Objectives and different approaches of users of financial statements 1.1.3. Relevant information: financial statements and other information (company information and its business environment) 1.1.4. Main financial statement analysis methods and techniques 1.1.5. Relation with finance theory: market efficiency hypothesis, modern portfolio theory and the capital asset pricing model RATIO ANALYSIS 1. Taking into account the balance sheet information presented in the table below for Company ONE and Company TWO, compute the Current ratio, the Quick ratio and the Cash to current liabilities ratio for the two companies and comment the results. ONE TWO Non-Current Assets (Ativos não correntes) 15000 3000 Inventories (Inventários) 48000 1000 Accounts Receivable (Clientes) 12000 900 Cash and Cash Equivalents (Meios Financeiros Liquidos) 1000 100 Shareholders' Equity (Capital Próprio) 6000 1000 Non-Current Liabilities (Passivo Não Corrente) 40000 3000 Current Liabilities (Passivo Corrente) 30000 1000 Current Ratio (Rácio Liquidez Geral) 2,033 2 Quick Ratio (Rácio Liquidez Reduzida) 0,433 1 Cash to Current Liabilities Ratio (Rácio Liquidez Imediata) 0,033 0,1 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜𝑂𝑁𝐸 = 48.000+12.000+1.00030.000 ≈ 𝟐, 𝟎𝟑𝟑 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜𝑇𝑊𝑂 = 1.000+900+1001.000 = 𝟐 𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜𝑂𝑁𝐸 = 12.000+1.00030.000 ≈ 𝟎, 𝟒𝟑𝟑 𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜𝑇𝑊𝑂 = 900+1001.000 = 𝟏 𝑪𝒂𝒔𝒉 𝒕𝒐 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝑹𝒂𝒕𝒊𝒐 = 𝑪𝒂𝒔𝒉 𝒂𝒏𝒅 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝐶𝑎𝑠ℎ 𝑡𝑜 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑅𝑎𝑡𝑖𝑜𝑂𝑁𝐸 = 1.00030.000 ≈ 𝟎, 𝟎𝟑𝟑 𝐶𝑎𝑠ℎ 𝑡𝑜 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑅𝑎𝑡𝑖𝑜𝑇𝑊𝑂 = 1001.000 = 𝟎, 𝟏 To comment on these results, we have to assume that these two companies belong to the same industry. For this reason, both of them should have ratios close to the industry standards; however, since we don’t know these standards, all the conclusions we can derive are very limited. In terms of these ratios, related to the liquidity of the company, we can refer that: The current ratio1 of both companies is really close, which means the industry average is probably near to 2. The quick ratio of both companies shows that the inventories is really important for both of them (because of the industry they are a part of, maybe), since the difference between the current ratio and the quick ratio is significant. Furthermore, we can conclude that the inventories are more important to the company ONE, since the differences between the two ratios is higher (which is a bad sign, because the money allocated in inventories cannot be used in other things. Furthermore, it also could mean two things: the final products are not being sold – if the inventory is full of finished products – or there is a bad management of raw materials – if the inventory is full of raw materials). O cash to current liabilities ratio is meaningless. 1 Preferably, the current ratio should be, at least 1. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 2 2. The table below reports Liquidity and Solvency ratios for Company P and Company X. What may you conclude from the analysis of the ratios? Comparing the two companies, what are the main differences? Company P Company X Financial Ratios Year N Year N+1 Year N Year N+1 Current ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 2.32 2.19 1.4 1.45 Quick ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 1.36 1.17 0.9 0.85 Collection Period = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑆𝑎𝑙𝑒𝑠 × 12 2.30 2.08 2.56 2.3 Days Accounts Payables Outstanding = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 × 12 3.46 2.92 3 3 Inventory Turnover = 𝑪𝒐𝒔𝒕𝒔 𝒐𝒇 𝑺𝒂𝒍𝒆𝒔𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔 3.63 4.13 6 5 Shareholders' Equity to Total Liabilities = 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔′𝑬𝒒𝒖𝒊𝒕𝒚𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 3.16 3.00 0.61 0.62 Shareholders' Equity to Total Assets = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝐸𝑞𝑢𝑖𝑡𝑦𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 0.76 0.75 0.38 0.38 Financial Leverage = 𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 0.24 0.25 0.62 0.62 Noncurrent Financing to Noncurrent Assets = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑜𝑛𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠𝑁𝑜𝑛𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 1.72 1.65 1.23 1.38 To comment on these results, we have to assume that these two companies belong to the same industry. For this reason, both of them should have ratios close to the industry standards; however, since we don’t know these standards, all the conclusions we can derive are very limited. Looking to the shareholders’ equity to total liabilities ratios2, we can conclude a lot about the capital structure of both companies. The company P is mainly financed by equity, while the company X is mainly financed by debt. Thus, company P’s solvency situation is better than company X’s. Since the amount of debt is related to the financial leverage3, it would be expected to the company X to have a higher ratio, which is the case. In terms of liquidity, company P is also in a better financial situation than company X, since its current ratio is higher. While mentioning liquidity, is also important to refer that inventories have a significant weight in these companies, and probably in the industry they belong to, since there is a significant different between their current and quick ratios. Speaking of inventory, we can see that company X is in a better position when it comes to inventory turnover4, sinceit presents higher ratios. 2 If the shareholders’ equity to total liabilities ratio is higher than 1, that means that the company is mainly financed by equity. If it is lower than 1, that means that the company is mainly financed by debt. 3 The financial leverage can be defined as the amount of debt a firm uses to finance its assets, and it’s used to increase the equity profitability. Thus, to a certain point it may be beneficial to use this strategy; however, if the company overuses it, the company reaches a prejudicial level of debt, because seeing the absurd amount of debt, creditors will rise their interest rate, since the company’s default risk is now higher. 4 The higher the inventory turnover (rate at which a company sells and replaces its stock of goods during a particular period) the better. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 COMPARATIVE AND COMMON-SIZE FINANCIAL STATEMENTS ANALYSIS 1. Founded in 1927, Riopele is one of the oldest textile companies in Portugal and an international reference in the creation and production of fabrics for fashion and clothing collections. The table below presents the balance sheet for the period 1993-1996. This was a period of high difficulties for the company. Make a brief comment on the financial performance of the company, focusing on its main investments and main sources of financing. Balance Sheets of Riopele, S.A. for the period 1993-1996 1993 % 1994 % 1995 % 1996 % Non-current Assets 9116995 41.1% 7982709 40.2% 7469003 37.9% 7307029 37.3% Intangible Assets 32521 0.1% 29108 0.1% 114938 0.6% 184482 0.9% Property, Plant and Equipment 25124530 113.3% 25075566 126.1% 25176207 127.7% 25361798 129.6% Amortization and Depreciation -16486884 -74.3% -17532916 -88.2% -18230222 -92.5% -18587428 -95.0% Financial Investments 471330 2.1% 471330 2.4% 463907 2.4% 404346 2.1% Impairments of Financial Investments -24502 -0.1% -60379 -0.3% -55827 -0.3% -56169 -0.3% Current Assets 13062853 58.9% 11898470 59.8% 12246397 62.1% 12256929 62.7% Inventories 8104062 36.5% 7760753 39.0% 7868922 39.9% 6992342 35.7% Raw materials 1118242 5.0% 1004173 5.1% 1102583 5.6% 788776 4.0% Work in progress 1890835 8.5% 1879721 9.5% 1932388 9.8% 1895407 9.7% Finished Products 5094985 23.0% 4876859 24.5% 4832963 24.5% 4585836 23.4% Goods 0 0.0% 0 0.0% 988 0.0% 365 0.0% Impairments of Inventories 0 0.0% 0 0.0% 0 0.0% -278042 -1.4% Accounts Receivables 4721110 21.3% 4077813 20.5% 3903888 19.8% 4111398 21.0% Impairments of Accounts Receivable -387657 -1.7% -360890 -1.8% -299769 -1.5% -293722 -1.5% Other current assets 378927 1.7% 211139 1.1% 328604 1.7% 1015066 5.2% State and other public entities 0 0.0% 60199 0.3% 14376 0.1% 93743 0.5% Cash and Cash Equivalents 246411 1.1% 149456 0.8% 430376 2.2% 338102 1.7% Total Assets 22179848 100% 19881179 100% 19715400 100% 19563958 100% Shareholders' Equity 10749131 48.5% 10451171 52.6% 10241106 51.9% 10298102 52.6% Share Capital 6500000 29.3% 6500000 32.7% 6500000 33.0% 6500000 33.2% Reserves 5736846 25.9% 5736846 28.9% 5736846 29.1% 5736846 29.3% Retained Earnings 0 0.0% -1823840 -9.2% -1720640 -8.7% -1956021 -10.0% Net Income for the period -1487715 -6.7% 38165 0.2% -275100 -1.4% 17277 0.1% Total Liabilities 11430717 51.5% 9430008 47.4% 9474294 48.1% 9265856 47.4% Non-current Liabilities 4338933 19.6% 2976881 15.0% 3217445 16.3% 3420333 17.5% Provisions 0 0.0% 0 0.0% 0 0.0% 81367 0.4% Bank Loans 2338933 10.5% 1976881 9.9% 3217445 16.3% 3338966 17.1% Bond Loans 2000000 9.0% 1000000 5.0% 0 0.0% 0 0.0% Current Liabilities 7091784 32.0% 6453127 32.5% 6256849 31.7% 5845523 29.9% Accounts Payable 1812830 8.2% 1430273 7.2% 1677095 8.5% 1271756 6.5% State and other public entities 231317 1.0% 271231 1.4% 173024 0.9% 185077 0.9% Bank loans 3693552 16.7% 2663227 13.4% 2275430 11.5% 2619104 13.4% Bond loans 0 0.0% 1000000 5.0% 1000000 5.1% 0 0.0% Other current liabilities 1354085 6.1% 1088396 5.5% 1131300 5.7% 1769586 9.0% Total Shareholders' equity + Total Liabilities 22179848 100% 19881179 100% 19715400 100% 19563958 100% Looking at the category “Property, Plant and Equipment”, we see that a good percentage of the assets are included in it, what is expected, since this is a textile company. Furthermore, we also conclude that this equipment must be really old by looking at the high values of the category “Depreciations and Amortizations”, which is a bad sign since this company is highly dependent on this equipment. Besides this category, the “Inventory” also has a huge weight in the distribution of the assets, specially the “Finished products”, which represents a red flag, because it means these products are not being sold, which is confirmed by the negative value of the category “Impairments of Inventories” in 1996. Furthermore, we can also conclude that the principal source of external financing is “Banks Loans”, as it has the higher weight when compared with the other external sources. Additionally, the company hasn’t the capacity to generate profit, as its “Net Income for the Period” is always negative. In conclusion, this company is in a terrible financial condition: their equipment is old and their net income is always negative, since they are not selling their products. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 1.2. Adjusting Financial Statements 1.2.1. Financial Statements and their limitations. 1.2.2. Adjusting financial statements: the importance of legal certification reports and Auditors’ reports 1.2.3. Earnings quality and its determinants. ADJUSTING FINANCIAL STATEMENTS 1. Below it is presented an excerpt from the legal certification of accounts or statutory audit report (Certificação Legal de Contas) of the company “Marcabem, S.A.” for the year 2017. Statutory Audit Report/Certificação Legal de Contas Report on the audit of the Financial Statements5 OPINION/OPINIÃO We have audited the financial statements of the company Marcabem – Marcadores e Materiais de Escritório, S.A., which comprises the statement of financial position as at 31 December 2017 (which shows total assets of 15.734.055€ and total shareholders' equity of 4.056.350€, including a net loss of 2.487.720€), the statement of income, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements, except for the effects of matters mentioned below, present fairly in all material respects, the financial position of the Marcabem, S.A. company as at 31 December 2017, and their financial performance and their cash flows for the year then ended in accordance with accounting and financial reporting standards adopted in Portugal through the SNC (Sstema de Normalização Contabilistica). BASIS FOR OPINION/BASES PARA A OPINIÃO … RESERVATIONS/RESERVAS (1st) The analysis of accounts receivable balance has revealed that the current impairments for credit risks are insufficient in 350.000€. (2nd) In the current year, the company has changed the accounting criteria of assets depreciation, shifting to the minimum rates allowed by tax regulations. As a consequence of this change, with which we disagree, the value of the depreciation decreased by 500.000€. (3rd) The company did not use the equity method of accounting (NCRF 13) to value its investments in associate companies. The use of the equity method would lead to a decrease in Shareholders’ Equity of 4.986.190€. (4th) A significant value of accounts receivable reported as current assets in the balance sheet (a value of 2.500.000€) should be considered as non-current assets. EMPHASIS/ÊNFASE In 2016, the company re-evaluated its land and properties based on a studyby an independent evaluator, resulting in a revaluation reserve of 793.805€. … Lisbon, 17th April 2018 O Revisor Oficial de Contas Question: Analyse the impact of the information contained in the auditors’ report in the Balance Sheet and Income Statement of the company. Following the information presented in the 1st reservation, we should increase the amount impairment losses in the income statement by 350.000€, which will make the net income decrease accordingly. In the Balance Sheet, the value of the net accountable receivable is going to decrease, because the amount of the impairment losses will be subtracted from the gross accountable receivable; and the net income (an account in the balance sheet) will also decrease accordingly. Following the information presented in the 2nd reservation6, and since the auditor does not agree with these changes, we should increase the value of the depreciation by 500.000€, in the income statement, because the company changed the accounting criteria of depreciation, and because of that, its value decreased, and, now, we should adjust it by increasing it, which will make the net income decrease accordingly. In terms of the balance sheet, the net assets (gross assets minus accumulation of depreciation), and the net income will decrease by 500.000€. 5 Note: The legal certification of the accounts of public limited companies are obligatory. However, the legal certification of the accounts of private limited companies is only obligatory if the company meets 2 of 3 defined limits for 3 years in a row. The auditing is based on statistical samples. Theses samples are judgmental, and are derived by subjective factors. Thus, the auditor cannot be 100% certain about his/her conclusions. However, the percentage of failures is very low. 6 Changing the accounting criteria, is one of the sources of distortion in financial statements Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Following the information presented in the 3rd reservation, in the balance sheet, we should decrease the value of “investment securities – financial investments” (account of the non-current assets), and the value of the “shareholders equity – adjustments on investments”. Following the information presented in the 4th reservation we just need to adjust the balance sheet by increasing the value of non-current assets, and decreasing the value of current assets. Following the information presented in the Emphasis, we don’t need to make any adjustments7. 2.1. Analysis of financing activities 2.1.1. Short-term financing (current liabilities) 2.1.2. Long-term financing (long-term liabilities and shareholders’ equity) 2.1.3. Off-balance-sheet financing PRACTICAL CASES 1. It is often asserted that using LIFO Inventory costing method during an extended period of rising prices and the expensing of all human resources costs are among the accepted accounting practices helping create hidden or secret reserves. a) Describe a secret reserve. Explain how companies create or increase such reserves. Secret reserve is the understating of equity, there are two ways to do it, overstating liabilities and/or understating assets. b) Explain the basis for saying the two specific practices cited create secret reserves. During a period where the prices are increasing, we can create a secret reserve, by using the LIFO (Last In, First Out) method. Using this method, when writing-off an inventory, we’re going to write-off the inventory with a higher price, which means that the inventories left have lower prices. Thus, the value of the inventories is lower than it should be in fact. Therefore, we understate the inventories, while increasing the cost of goods sold. For this reason, the net income and the equity are lower. During a period where the prices are decreasing, we can create a secret reserve, by using the FIFO (First In, First Out) method. Using this method, when writing-off an inventory, we’re going to write-off the inventory with a higher price, which means that the inventories left have lower prices. Thus, the value of the inventories is lower than it should be in fact. Therefore, we understate the inventories, while increasing the cost of goods sold. For this reason, the net income and the equity are lower. Another way is to create secret reserves is to expense all the R&D costs, when some of them should be capitalized. Thus, the value of intangible assets is understated. c) Discuss the possibility of creating a secret reserve in connection with accounting for a liability. Explain and give an example. It is very easy to understate assets by overstating liabilities, because these last ones are based in estimations. With the principle of conservatism, you can overstate the value of provisions, and consequently, the value of liabilities and equity. d) Describe objections to the creation of secret reserves. Secrete reserve is created by understating equity. There are two easy ways of doing that: one is to understate the assets of the company, and the other one is to overstate the liabilities of the company. The first and obvious objection for the creation of secrete reserve is that only the insider of the company are likely to know the existence of them, and their value. Thus, financial statement readers who are unaware of the existence of secrete reserves may regard the company’s securities stocks as overvalued, when in fact those stocks are correctly valued or even undervalued. If that is the case, the statement readers, when comparing the financial statements, and the market price of the stock, probably will think that the stock’s price are overpriced, because when looking to the FS they do not find information that justifies the fundamental value of the company compared to its market value. As a result of this, stockholders may be willing to sell their stocks with too little consideration, and this is not good for the company nor the market. Sometimes is easy to associate secret reserves with earnings management strategies, especially with the income smoothing strategy, since the creation of secret reserves tends to sift income between periods, and usually has a smoothing effect on the reported income, in the different years. If an asset is understated or a liability is overstated, in a certain period, to create a secret reserve, usually means that some expenses are going to be also overstated, therefore, the current income will be understated. In some subsequent period, the potential service of the unrecognized or undervalued asset will be consumed. If its cost were understated or not recognized, expenses of the later period will be understated, and the income of the later period will be overstated. The result of all of this is that in some years the income is lower/higher than it should be. 2. Nearly all companies confront loss contingencies of various forms. a) Describe what conditions must be met for a loss contingency to be accrued with a change to income. 7 The Emphasis is different from the Reservations, because it’s not clear if we need to make any adjustment or not, this is just a comment. The auditor does not conclude if the reevaluation was justified or not. It will depend on the financial analyst to do or not the adjustment. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Mobile User For a lost contingency to be registered two conditions must be meet: the probability of occurrence of the loss must be high, and we should be able to reasonably calculate the amount of the cost, regarding the loss. If these conditions aren’t meet, we should only discloser the contingency in a note in the financial statement. Gain contingencies are not allowed to be register; therefore, it should be only discloser as a note in the financial statement. b) Explain when disclosure is required, and what disclosuresare necessary, for a loss contingency that does not meet the criteria for accrual of a change to income. When the two conditions are not meet, the loss contingency cannot be occurred in the financial statements, instead we should discloser them in a note in the financial statement. This discloser should be made for an estimated loss, for the loss contingency, when there is at least a reasonable possibility (not a high probability, a reasonable) that a loss might be incurred. The discloser should indicate the nature of the contingency, and estimate possible loss. If it is not possible to estimate the possible loss at least should indicate the range of values, or say that the estimate cannot be made. c) Give some examples of loss contingencies that companies report. Loss contingency is any existing situation involving uncertainty as to possible loss, that will be resolve when future events occur, or not. Examples: law suits, claims arising from products with defect and warranties, litigation, political risk (additional risk that companies that operate overseas face) 3. Explain what means “off-balance-sheet financing”. Provide some examples. Off-balance-sheet financing refers to the nonrecording some financing operations on their financial statements. Operating leases (ver aula) Securitization of account receivables or factoring with resource (ver aula) 2.2. Analysis of investing activities 2.2.1. Short term assets (current assets) 2.2.2. Fixed assets (non-current assets) 2.2.3. Special topics: the financial reporting of derivative securities, intercorporate investments and international activities PRACTICAL CASES 1. Key comparative figures ($ millions) for both NIKE and REEBOK follow: NIKE REEBOK Financing (Liabilities + Equity) $5,397.4 $1,756.1 Net Income (Profit) $399.6 $135.1 Revenues $9,553.1 $3,637.4 1.1 What is the total amount of assets invested in each company? 𝑻𝒐𝒕𝒂𝒍 𝑨𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕𝒔 𝑰𝒏𝒗𝒆𝒔𝒕𝒆𝒅 = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 NIKE: $5.3974,4 REEBOOK: $1.756,1 1.2 How much are expenses for each company? 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 NIKE: 9.553,1 − 399,6 = 9.153,5 REEBOK: 3.637,4 − 135,1 = 3.502,3 1.3 What is the return on investment for each company? What can you conclude (assume competitors average a 4% return)? 𝑹𝑶𝑰 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 NIKE: 399,65.3974,4 = 7,4% REEBOK: 135,11.756,1 = 7,7% We can conclude that the return on investment, for these two companies, is positive and higher than its competitors. So, it seems they are in a good financial position. Even though the ROI of the companies is really close to each other, if you look at the absolute number, the situation of the companies is not the same. The market share of one of the companies (Nike) is higher than the other (Reebok). 2. A balance sheet, which is intended to present fairly the financial position of a company, frequently is criticized for not reflecting all assets under the control of a company. a) Cite some examples of assets that are not included on the balance sheet. The inventory – LIFO (ver aula), the value of the assets is understated: Intangible assets – companies do not capitalize some intangible assets, that should be registered (the name of a specific product, a brand’s name…) (research – expenses; development – intangible asset) (ver aula) b) Discuss the implications of unreported assets for financial statement analysis. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 The book values of the assets and liabilities are the starting point for the accounting-based evaluation of the company, if there are assets not registered but have economic value, eventually they will give rise for higher future abnormal earnings for the company. Therefore, the analyst trying to value the company must consider the impact of unrecorded assets when estimating future profitability. If we know they exist, we should keep them in mind, or we will-under evaluate the future profitability. 3. Toro Manufacturing is organized on January 1, Year 5. During Year 5, financial reports to management use the straight- line method of depreciating plant assets. On November 8, you (as a consultant) hold a conference with Toro’s officers to discuss the depreciation method for both tax and financial reporting. Toro’s president suggests the use of a new method he feels is more suitable than straight line during this period of predicted rapid expansion of production and capacity. He shows an example of his proposed method as applied to a fixed asset with an original cost of $32.000, estimated useful life of five years and a salvage value of $2.000, as follows: Year Years of life used Depreciation Expense Accumulated Depreciation at Year-end Book Value at Year-end 1 1 $2000 $2000 $30000 2 2 $4000 $6000 $26000 3 3 $6000 $12000 $20000 4 4 $8000 $20000 $12000 5 5 $10000 $30000 $2000 Questions: a) What are the purposes of and the principle behind accounting for depreciation? Depreciation is a system whose purpose is to allocate the cost of (in)tangible capital assets, over their useful live in a systematic and rational manner. It is important that the depreciation method fulfills these 2 conditions. Depreciation is the cost allocation through which the productive effort, which corresponds to the cost, is matched with the productive accomplishments, which corresponds to revenues. We should depreciate more (costs) when we are using more of that given asset, because we are producing more revenue. This process is founded on the matching principle. b) Discuss the circumstances, if any, where this method is reasonable and those, if any, where it is not. The purpose of the depreciation method is to be systematic and rational in cost allocation, ergo, its reasoning depends of the situation. But as a general rule, we assume that manufactures prefer to use their new equipment, therefore, they are more used in the first years, which will lead to higher rates of depreciation. This is because manufactures typically preferred to use the new equipment as much as possible, and their old equipment only the minimum amount needed, because the newer equipment works better. The purposed method matches lower depreciation and lower reparation charges in the early years. While it matching higher depreciation and higher reparation charges in the latest years; however, the reported net income in the early years would be much higher than on the last years, which doesn’t follow the matching principle. So, this is an unreasonable and undesirable variation during periods of identical operation. However, if the expected level of operation including equipment usage in the early years is expected to be low, when compared to latter years, then the pattern of the depreciation charges of the purposed method in the table approximately parallels expect benefits, so, in that case it would be acceptable. c) Do depreciation charges recover or create cash? Explain. Depreciation charges do not recover or create cash, only revenues producing activities have this power. d) How does the new method affect availability of cash generated by operations? Depreciation can affect cash in at least two ways. Depreciation charges affect reported income (depreciation is occurred as a cost), therefore, the level of depreciation can affect many management decisions, such as the price of the product, the product selection, the dividend distributed… The depreciation charges affect the reported taxable income, it impacts the amount of income taxes paid in the year of deduction. With the purposed method, for tax purposes would reduce the total tax bill over the life of the asset if the tax rate increased over the years. 4. An important element in accounting for investment securities concerns the distinction between its non-currentand current classification. 4.1 Why do most companies maintain an investment portfolio consisting of both current and non-current securities? Companies invest in current securities (in highly liquid securities) to temporarily invest their excessive cash, and getting back some income from it. Companies invest in non-current securities, to generate extra income, to diversify their portfolio, and to control other companies (suppliers, competitors, companies that are used to distribute their products, …) 4.2 What factors should an analyst consider when evaluating whether investments in marketable equity securities are properly classified as current or non-current? Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 When evaluating whether investments in marketable equity securities are properly classified as current or non-current, analyses should consider both the purpose and the nature of the investment (non-current – held to maturity, and receive the interest; current – trading securities, very liquid) 4.3. How do these factors affect the accounting treatment for unrealized losses? If it’s a realized loss associated with a trading security (because they are highly liquid), it should be accounted in the current assets of the company. If it is an unrealized loss associated with trading securities, it should be accounted in the net income of the company. But that is the only exception. Another unrealized losses/gains, such as those associated with financial investments like derivatives securities, or exchange losses and gains should be accounted in the comprehensive income of the company. 2.3. Analysis of operating activities 2.3.1. The operating cycle 2.3.2. Operating cycle financial needs and resources 2.3.3. Revenues and expenses structure 2.3.4. Alternative income classifications and measures PRACTICAL CASES 1. Perform a comparative analysis of Eastman Corporation by completing the analysis below. Describe and comment on any significant findings in your comparative analysis. Year 6 Year 5 Year 4 Annual Average Amount $ %8 $ %8 $ %8 Net Sales 6880 100 3490 100 2860 100 4410 Cost of Goods Sold 3210 47 2810 81 1810 63 2610 Gross Profit9 3670 53 680 19 1050 37 1800 Operating Expenses 930 14 465 13 945 33 780 Income Before Taxes10 2740 40 215 6 105 4 1020 Net Income 1485 22 145 4 58 2 563 The values on the table are quite volatile. Some of them have an increasing or decreasing tendency (sales, net income), but other items don’t have a tendency. 2. A retail company sells hotel and office furniture. 2.1 Describe the operating cycle of this company. It begins when they purchase the furniture, and it ends when they collect the money from clients. 2.2 Indicate if the following operations increase (+), decrease (-) or do not affect (0) the operating cycle of the company: a. A higher number of customers pay in cash. Operating cycle will decrease – they pay sooner b. A higher number of goods/inventories is bought (due to an expected price increase) Operating cycle will stay the same c. A higher percentage of goods/inventories purchases is paid in cash. Operating cycle will stay the same 3.1. Liquidity and Solvency Analysis (Credit analysis) 3.1.1. Liquidity, working capital and working capital requirements 3.1.2. The functional balance sheet and the fundamental treasury relation 3.1.3. Analysis of liquidity ratios 3.1.4. Analysis of operating activity ratios. The cash cycle. 3.1.5. Other measures of liquidity 3.1.6. Solvency analysis 3.1.7. Capital structure and solvency 3.1.8. Coverage ratios 3.1.9. Loss and recovery of solvency PRACTICAL CASES – WORKING CAPITAL REQUIREMENTS COMPUTATION (INDIRECT METHOD) 8 % = 𝑥𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 9 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 – 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 10 𝐼𝑛𝑐𝑜𝑚𝑒 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥𝑒𝑠 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 1. Consider the following set of indicators of the retailing company RATIO, over two consecutive years: Indicators Year 1 Year 2 Current Assets – Current Liabilities 60.000€ 64.600€ Receivable Days = Accounts Receivable/Sales*365 45 80 Inventory Days = Inventory/Sales *365 170 217 Payable Days = Accounts Payables/Sales*365 183 240 Sales 1.002.000€ 800.000€ Net trade cycle in days of sales 32 57 Working Capital requirements (NFM) 87.846,58€ 124.931,51€ Net Liquidity – 27.846,58€ – 60.331,51€ Questions: a) Complete the table by computing the working capital requirements (in days of sales and in value). 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑁𝑒𝑡 𝑇𝑟𝑎𝑑𝑒 𝐶𝑦𝑐𝑙𝑒 = 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑙𝑏𝑒 𝐷𝑎𝑦𝑠 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐷𝑎𝑦𝑠 − 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝐷𝑎𝑦𝑠 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 = 𝑁𝑒𝑡 𝑇𝑟𝑎𝑑𝑒 𝐶𝑦𝑐𝑙𝑒 × 𝑆𝑎𝑙𝑒𝑠365 𝑁𝑒𝑡 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 = 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 − 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 b) Comment on the results and its implications for liquidity analysis. The net trade cycle increased, which puts the company in a bad situation, because it means that it will need to finance the operating activities for more days. This increase is due to the huge increase of the receivable and the inventory days in comparison with the increase of the payable days. The net liquidity decreased because the increase of the working capital requirement was higher than the increase of the working capital. In addition, the sales also decreased, which means that this company is in a really bad place in terms of liquidity position. PRACTICAL CASES – FUNCTIONAL BALANCE SHEET 2. Classify each of the following operations of the manufacturing company NORM accordingly to its corresponding financial cycle, and indicate if it is a source of funds or an application of funds. a) Sale of an equipment by 550000€. – investment cycle – source b) A sale of finished products with a profit of 75000€. – operating cycle – source c) Repayment of a long-term bank loan. – financing cycle (long-term) – application d) Payment of dividends in the amount of 420000€. – financing cycle (long-term) – application e) Issue of 100.000 ordinary shares. – financing cycle (long-term) - source f) Purchase of a high technology machine. – investment cycle – application g) Issue of a long-term bond. – financing cycle (long-term) – source h) Acquisition of a holding position of 50% in the company EXTRA. – investment cycle – application i) A sale of finished goods with a loss of 15000€. – operating cycle – application j) Bank overdraft in the amount of 150000€. – financing cycle (short-term) – source 3. The balance sheets for two consecutive years and the Income statement for the last year of the company “SEM - Ideias, S.A” are presented below (values in Euros). Balance Sheets as of 31/12/N and 31/12/N+1 ASSETS 30/12/N 30/12/N+1 Non-Current Assets Equipment 4 500 4 500 Accumulated depreciations - Equip. (1 125) (2 250) Buildings 68 800 68 800 Accumulated depreciations - Buildings (17 200) (20 610) Lands 34 400 34 400 Total Non-Current Assets 89 375 84 840 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Current Assets Inventories Goods 105 434 128 238 Receivables Accounts Receivable 104 250 118 532 Cash & Equivalents 8 450 19 179 Total Current Assets 218 134 265 949 Total Assets 307 509 350 789 Shareholders' Equity Share capital 50 000 50 000 Reserves 87 311 110 205 Revaluation surplus 39 375 39 375 Net Income 22 894 26 866 Total Equity 199 580 226 446 Liabilities Non-Current Liabilities Bank Loans 10 000 10 000 Current Liabilities Accounts Payables 73 420 82 345 Bank Loans 12 305 14 244 Taxes Payable (Incometaxes) 12 204 17 754 Total Liabilities 107 929 124 343 Total Equity + Liabilities 307 509 350 789 Income Statement N+1 Sales 884 632€ Cost of goods sold 763 425€ Gross profit margin 121 207€ Administrative and selling costs 64 232€ Depreciations and Amortization expenses 4 565€ Earnings before interest and tax 52 410€ Interest expense 7 790€ Earnings before tax 44 620€ Income tax expense 17 754€ Net Income 26 866€ Questions: 1) Based on the Balance sheets, compute the working capital, the working capital requirements and the Net Liquidity indicators for the two years. Comment on the results obtained. N N+1 1 Long-term or stable liabilities (Shareholders’ Equity + Non-current Liabilities) 209.580€ 236.446€ 2 Non-current Assets 89.375€ 84.840€ 3 Working Capital (1 – 2) 120.205€ 151.606€ 4 Accounts Receivables 104.250€ 118.532€ 5 Inventories 105.434€ 128.238€ 6 Operating Current Assets (4 + 5) 209.684€ 246.770€ 7 Accounts Payable 73.420€ 82.345€ 8 Operating Current Liabilities (7) 73.420€ 82.345€ 9 Working Capital Requirements (6 – 8) 136.264€ 164.425€ Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 10 Net Liquidity (3 – 9) -16.059€ -12.819€ The net liquidity is negative, which is a bad sign, because it means that the existing working capital isn’t enough for covering the required working capital. To change this situation, the company could either increase the working capital or decrease the working capital required. 2) What is the Net Trade Cycle, measured in days of sales, in Year N+1? In this type of exercise, we can either compute the value of the receivable, inventory and payable days, or using the formula of the working capital requirements. 𝑊𝐶𝑅 = 𝑁𝑇𝐶 × 𝑆𝑎𝑙𝑒𝑠365 ⇔ 𝑁𝑇𝐶 = 365 × 𝑊𝐶𝑅𝑆𝑎𝑙𝑒𝑠 ⇔ 𝑁𝑇𝐶 = 67,84 3) Assuming that the projected sales for year N+2 are 1200000€, what will be the required working capital in that year? Note: Make the assumptions you may consider necessary. To estimate the required working capital, we assume that operating conditions are the same, thus, the net trade cycle remains da same. 𝑊𝐶𝑅 = 𝑁𝑇𝐶 × 𝑆𝑎𝑙𝑒𝑠365 ⇔ 𝑊𝐶𝑅 = 67,84 × 1.200.000365 ⇔ 𝑊𝐶𝑅 = 223.041,9 4. The retailing company DáTudo presented the following financial information as of December, 31, Year N-1 and Year N (values in Euros): Year N-1 Year N Inventories (goods) 3.000.000 3.800.000 Accounts Receivable 6.000.000 8.000.000 Accounts Payable 3.200.000 4.000.000 In the year N, the company registered sales of 25.000.000 euros and its Working Capital amounted to 12.000.000 euros at the end of that year. 23% VAT is applied to the companies´ purchases and sales and the company practices a commercial margin of 25% on sales prices. The company is planning an investment (a new equipment) in the beginning of Year N+1 as follows: • The value of the new equipment is 10.000.000 euros (this equipment will be depreciated over 10 years using the straight- line method). • With this investment the company expects an increase of sales in the amount of 7.000.000 euros. • Net Income is also expected to increase by 800.000. • To finance this investment, the company plans to obtain a long-term bank loan in the amount of 3.000.000 euros (reimbursement of the loan beginning in year N+3) and a short-term bank loan of 500.000 euros (reimbursement of the loan beginning in Year N+2). Required: 1. Compute the Working Capital, the Working Capital requirements and the Net Liquidity indicators in Year N, and their forecasted values in Year N+1, assuming that the operating conditions are maintained. Note: You can build the Functional Balance Sheet (as analytical as possible) for year N and Year N+1. N-1 N N+1 1 Inventory 3.000.000 3.800.000 4.864.000 2 Accounts Receivables 6.000.000 8.000.000 10.240.000 3 Accounts Payable 3.200.000 4.000.000 5.120.000 4 Sales 25.000.000 32.000.000 5 WC 12.000.000 6.800.000 6 WCR (1 + 2 – 3) 7.800.000 9.984.000 7 Nel Liquidity (5 – 6) 4.200.000 -3.184.000 N+1: Assuming that the operating conditions stay the same, the variation of Inventory, Accounts Receivables and Accounts Payable is the same as the sales’ variation. ∆𝑆𝑎𝑙𝑒𝑠 = 32 − 25 25⁄ = 28% Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 𝐼𝑁+1/𝐴𝑅𝑁+1/𝐴𝑃𝑁+1 = 𝐼𝑁/𝐴𝑅𝑁/𝐴𝑃𝑁(1 + 28%) 𝑊𝐶 = 𝑊𝐶𝑁 + 3.000.000𝐿𝑜𝑛𝑔−𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 + 800.000𝐸𝑞𝑢𝑖𝑡𝑦 (𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒) − (10.000.000𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 − 1.000.000𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑁) 2. Analyse the impact of the planned investment on the Liquidity position of the company. Make the comments and suggestions you consider relevant. The financing strategy adopted by the company lead to the decrease of the net liquidity, making this value drop below zero in N+1, which jeopardizes the liquidity position of the company. The situation was led by the financing strategy chosen, because non-current assets should always be financed by long-term liabilities, in order to keep up with the increase of the non-current assets (by doing this, the WC will not drop drastically) however, they decided to use short-term financing. Thus, to solve this situation (negative net liquidity), the company should increase the amount of long-term liabilities or decrease the WCR by improving the operating conditions. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASES – LIQUIDITY AND SOLVENCY ANALYSIS 1. Huff Company and Mesa Company are similar firms that operate in the same industry. The following information is available: HUFF MESA Year N Year N-1 Year N- 2 Year N Year N- 1 Year N-2 Current ratio (Liquidez Geral) 1.6 1.7 2 3.1 2.6 1.8 Quick ratio (Liquidez Reduzida) 0.9 1 1.1 2.7 2.4 1.5 Accounts receivables turnover (Rotação de Clientes) 29.5 24.2 28.2 15.4 14.2 15.0 Inventory turnover (Rotação de Inventários) 23.2 20.9 16.1 13.5 12.0 11.6 Working Capital (Fundo de Maneio, em u.m.) 60000 48000 42000 121000 93000 68000 Question: Write a one-half page report comparing Huff and Mesa using the available information. Your discussion should include their ability to meet current obligations and to use current assets efficiently. Since we don’t have the industry benchmark, this analysis will not be as deep and accurate as it could be. Looking at the Working Capital of both companies e can conclude, in one hand, that MESA has a higher value than Huff in N, N-1, N-2, and, in the other hand that in both companies this value is increasing throughout the years. Since we don’t have any information about the Working Capital Requirements, nor the net liquidity, we can’t extract any information about the liquidity position from these values presented on the table. Moving on to the liquidity ratios, we can see there is a significant difference between the current ratio and the quick ratio in both companies, being this difference higher for HUFF, which implies that its level of inventory is stronger. We can say if this signs a bad situation or not, since we don’t have the industry benchmark. Throughout the years, in HUFF, the current and quick ratios are decreasing, while in MESA these values are increasing. (Since we don’t have the industry benchmark, we can’t choose which one is in a better position in terms of liquidity. However, if we use the rule of thumb, HUFF is closer to the expectable values (2 for the CR, and 1 for the QR), while MESA seems to have an excess of liquidity). Moving on to the turnovers, we see that both of them are increasing over the years, symbolizing an increase in the companies’ efficiency (the higher the turnover, the better). However, HUFF seems to be more efficient, since it presents higher turnover values (however, this could be explained by the fact that this company might be conservative in its decisions about its inventoryand financing its clients, which is bad, in the long-term, because it could mean the loss of clients). But, once again, we should use the industry benchmark to have a precise conclusion. 2. Selected ratios for a company over the last three years as well as the average ratios of its industry in the last year are presented below. Based on these ratios, comment on the liquidity and solvency position of the company using the industry benchmark to identify any potential problems. Ratios Formulas N-2 N-1 N Industry Benchmark (N) Current ratio Current Assets/Current Liabilities 2.95 2.80 2.72 2.10 Quick ratio (Current Assets-Inventories)/Current Liabilities 1.30 1.23 1.11 1.10 Shareholders' Equity to total liabilities ratio Shareholders' Equity/Total Liabilities 1.32 1.23 1.23 1.25 Financial leverage Total Liabilities/Total Assets 43% 45% 45% 44% Interest coverage ratio EBIT/Interest Expense 6.0 5.4 4.7 4.0 Accounts receivable turnover Sales/Accounts Receivable 6.6 5.0 5.9 8.1 Inventory turnover Cost of Goods Sold/Inventories 2.7 2.0 2.0 3.3 Assets Turnover Sales/Total Assets 1.3 1.2 1.2 1.7 As we can see, there is a significant difference between the current and the quick ratio, which implies a significant weight of the inventories in the total assets. This is a recurring thing in the industry that the company operates in, as we Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 can see by the industry benchmark. Furthermore, we can see that the company’s CR and QR are higher than the industry’s ones. However, throughout the years, theses ratios have been decreasing and getting closer to the industry benchmark, and to the rule of thumb. The turnovers are decreasing over the years (which means a decrease in the efficiency of the company), and are way below the industry benchmark, therefore, when compared with its competitors, the company is having problems collecting money from its customers, and to sell its inventory, which jeopardizes the liquidity position of the company, ergo, this situation should be fixed. Looking at the Shareholders’ Equity to Total Liabilities Ratio, we conclude that the company is mainly financed by equity (because the ratio is higher than 1), which is expected, since high level of debt is not recommended. However, over the years, the company decided to increase the levels of debt, to benefit from the benefits form financial leverage, which resulted in the decrease of this ratio. With this being said, we should check if the company has the ability to pay this debt. Looking at the interest coverage ratio, we see that the company is in a good position (especially because its value is above the industry benchmark), even though it decreased over the years, since the level of debt increased. In conclusion, the company appears to have a strong and stable solvency position, and a semi-good liquidity position (but the turnovers are a huge red flag, that should be taken into account). 3. The “Beta, S.A.”1 company, is a company active in the design, production, installation and assistance of electronic equipment and systems. Its’ share capital is 1475000 m.u.’s, it employs 220 people and in 1999, its turnover (Sales + Services) was 3195179 m.u.’s. In that same year, its shareholder structure underwent considerable changes. After a capital reduction through the elimination of accumulated losses in previous years, the share capital was increased by 600000 m.u.’s, and is currently 1475000 m.u’s. Its main customers are institutions linked to the National Defence sector. This concentration of activities in a group of customers belonging to a sector with well-known budget constraints has contributed towards a problematic economic and financial situation. Since 1997 a strategy was defined that was based upon the basic assumption that the company could only survive if it followed the restructuring efforts being made by European Defence companies. In this context, the company started to make efforts in: - the insertion in European networks of defence industries; - the diversification of its activity, in order to free itself from the excessive dependence on the Forças Armadas Portuguesas (Armed Portuguese Forces) as its dominant customer; - the association with technologically evolved foreign partners and that allow entering new markets (the chosen partner was a French company). Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Following is table A that shows some of the company’s indicators relating to its financial situation for the 1997-1999 triennium. Based on these indicators, as well as the information given above, briefly comment on the company’s financial equilibrium. Financial Indicators of Company "Beta, S.A." 1997 1998 1999 Total Assets 6.768.372 5.156.881 5.676.628 Intangible Assets 1.633.624 1.503.918 1.777.338 Tangible Fixed Assets 410.698 385.453 357.231 Current Assets 4.211.179 2.714.073 2.697.082 Shareholders' Equity 1.618.013 1.033.390 1.743.339 Net Income -140.806 -338.493 109.949 Sales 3.074.053 1.934.204 3.195.179 Working Capital 515.030 -350.040 -516.171 Shareholders' Equity to total assets ratio 23.90% 20.00% 30.70% Shareholders' Equity to total liabilities ratio 0.31 0.25 0.44 Shareholders' Equity/Non-current liabilities 1.11 0.98 2.42 Interest Expense/EBITDA 28.80% 59.40% 22.80% Advances from customers/Current liabilities 48.80% 58.40% 43.70% Being Beta a company related to active in the design, production, installation and assistance of electronic equipment and systems it is normal that the intangible assets are higher than the tangible fixed assets, since it must have a high amount of R&D activities. This company, due to the concentration of activities in a group of customers belonging to a sector with well-known budget constraints, presents a low level of net income (when this value isn’t negative), which clearly puts the company in a bad situation, since it means that it has difficulty in generating operating profit (one of the main sources of self- finance). Looking at the capital structure ratios, we can see that this company is mainly financed by debt, even though the Shareholders' Equity to total liabilities ratio increased a lot in 1999. Which is concerning for this type of business (being a high-risk business, the level of interest rate of loans must be really high). Therefore, the company should consider increasing the level of equity by: increasing the net income (by increasing the operating profitability, and retaining most of it) and/or asking shareholders for money. In terms of the company’s liquidity position, we can conclude that the company is in a really bad position, since the Working Capital is negative (the current liabilities are higher than the current assets, and unless the WCR is more negative than the WC, which is unlikely, the net liquidity will be negative). Furthermore, the Advances from customers to Current liabilities his really high, which means that the company uses the advances from customers to meet some of its short-term obligations. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 3.1. Cash Flow Analysis 3.1.1. The concept of cash flow (vs earnings vs company self-financing) 3.1.2. The Cash Flow Statement 3.1.3. Implications to financial analysis PRACTICAL CASES – ANALYSIS OF CASH FLOW STATEMENT 1. The table below presents a summary of the Cash Flow Statements of three companies from the same industry. Company A Company B Company C Cash Flow from Operating Activities -300 -300 300 Cash Flow from Investing Activities -900 -30 -90 Cash Flow from Financing Activities 1200 210 -240 Cash and Cash Equivalents at the beginning of year 150 150 150 Cash and Cash Equivalents at the end of year 150 30 95 Questions: 1) Compute the Cash and Cash Equivalents at the end ofthe year for the three companies. 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑦𝑒𝑎𝑟= 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠+ 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑦𝑒𝑎𝑟 2) Explain what may have caused the negative net cash flow from Financing Activities presented by Company C. The cash flow from financing activities is negative. This could be caused by paying back some debt and by distributing some dividends. Cash flow from operating activities are positive, so the company is generating cash from its operations, and might be taking advantage of that, so it is paying back debt, and distributing dividends. 3) Comparing Company A and Company B, of which would you prefer to be a shareholder? Company A Both of them have negative CFO, which means that they have problems to generate cash, which is bad, ergo they should look into it and trying to solve this situation. Thus, we should look at the CFF and CFI. Since company A presents a lower value of CFI, it means that the company is making more investment (MAYBE in fixed assets – if so, these investments are going to pay-back in the future, and generate cash), than company B, therefore, it has more potential to grow. (it seems to be a new company, or a company that is being restructured). Since company A, needs money to invest, is normal to its CFF to be high, because they are probably taking a lot of loans, or issuing new stocks. 4) In relation to Company C, do you think the Cash Flow Statement reveals some worrying situation? Explain. The CFO is positive, and that’s a good sign for any company, because the objective of a company is to generate cash from operating activities – so, at this point there isn’t any concern. The CFF is negative, maybe the company is using some of the cash generated from the operations to pay-back the loans, or to distribute in form of dividends. The only thing that could be a little worrying is related to the CFI, because even though it is negative, it is a small value, which means that the company is not investing much in fixed assets, for example – this is bad because it means that the company is not going to grow that much; but if it is a mature business this is normal; so, to know for sure, we would need more information. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 2. The Statement of Cash flows for Yahoo! is reproduced here2: YAHOO! INC Consolidated Statements of Cash Flows (in thousands $) Year 8 Year 7 Year 6 Cash flow from operating activities Net Income (Loss) 25.588 -25.520 -6.427 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 10.215 2.737 639 Tax benefits from stock options 17.827 Non-cash charges related to stock options grants and warrant issuances 926 1.676 197 Minority interests in operations of consolidated Subsidiaries -68 -727 -540 Purchased in-process research and development 17.300 Other non-cash charge 21.245 Changes in assets and liabilities Accounts receivable, net -13.616 -5.963 -4.269 Prepaid expenses 2.144 -6.110 -386 Accounts payable 515 2.425 1.386 Accrued expenses and other current liabilities 16.688 7.404 4.393 Deferred revenue 33.210 2.983 1.665 Due to related parties -451 330 948 Net cash provided by (used in) operating activities 110.278 480 -2.394 Cash flow from investing activities Acquisition of property and equipment -11.911 -6.722 -3.442 Cash acquired in acquisitions 199 Purchase of marketable securities -471.135 -58.753 -115.242 Proceeds from sales and maturities of marketable securities 158.350 86.678 43.240 Other investments -5.445 -1.649 -729 Net cash provided by (used in) investing activities -329.942 19.554 -76.173 Cash flow from financing activities Proceeds from issuance of common stock, net 280.679 7.516 42.484 Proceeds from issuance of convertible preferred stock 63.750 Proceeds from minority interests 600 999 1.050 Other 1.106 128 Net cash provided by financing activities 281.279 9.621 107.412 Effect of exchange rate changes on cash and cash equivalents 288 -380 -63 Net change in cash and cash equivalents 61.903 29.275 28.782 Cash and cash equivalents at beginning of year 63.571 34.296 5.775 Cash and cash equivalents at end of year 125.474 63.571 34.557 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Required: a. Yahoo!’s operations did not produce significant cash flows during Year 6 and Year 7. How does Yahoo! finance its growth in the absence of sufficient operating cash flows? It is true, that during year 6 and 7, the company didn’t produce significant CFO. In fact, for year 8, this value is negative. Facing the absence of these CF, we should ask ourselves how did the company financed its activities. So, we need to look at different sources of CF, like inventing and financing activities. If we take a closer look at FA, we see that in year 6 and 7 (even though it presents lower values), we have a significant cash inflow from the issuing of new stocks and also from the issuing of convertible preferred stocks. So, the company used this method to finance its activities. b. What appears to drive the operating cash flows of Yahoo!? In year 6 we have negative CFO, in year 7 we have a positive, but lower CFO, and in year 8, we have a strong and positive CFO. If we look at several items, that explain this result, we can see that the net income was negative in year 6 and 7, but, then, in year 8 it was positive. Thus, what drives the net CFO is the net income – when it was positive, it is able to generate significant CFO, when it is negative the value of CFO is negative or close to zero. c. Yahoo! engages in purchases and sales of marketable securities. Why do you believe Yahoo! pursues this activity? Looking at the IA, we see that, in fact, the company purchases marketable securities, and it does that quite often, and also sometimes sells marketable securities. The company is generating lots of cash reserves, to be used in the future to finance the growth of the company, by issuing new stock (looking at FA), that is not investing yet. The investment starts when the company invests those cash reserves in markable securities, to try to earn a higher return than it would have if they leave it as cash. They are trying to invest that excess of cash in order to gain higher returns, while it waits the right moment to invest in the growth of the company. d. Yahoo! reports $33.21 million of deferred revenue. Based on your understanding of Yahoo!’s operations, what do you believe this amount represents? Deferred revenue refers to cash that is received before the product/service is delivered, which means that the company is receiving money before delivering the product/service. In this case, most of these are advertising revenues that are paid in advance, because the nature of the activities of the company is like this: customers usually pay advertisement in advance. 3.2. Profitability and Risk Analysis (operational and financial risk) 3.2.1. Return on assets and its components 3.2.2. Return on equity and the leverage effect: additive and multiplicative models 3.2.3. Productivity analysis 3.2.4. Operational and financial risk analysis PRACTICAL CASE – RELATION BETWEEN LIQUIDITY AND RETURN Below it is reported a company’s year-end Balance Sheet and Income Statement (values in Euros). Selected financial and economic ratios for the company as well as for its industry are also reported. BALANCE SHEET INCOME STATEMENT Tangible Fixed Assets 58 500 Sales 324400 Inventories 48 300Cost of Goods Sold 284500 Accounts Receivable 67 200 Cash & Cash Equivalents 15 500 Gross Profit Margin 39 900 Total Assets 189 500 Other operating costs 23 000 Shareholders’ Equity 72 200 Operating Income 16 900 Long-term Bank Loans 51 300 Interest expense 7 800 Accounts Payable 25 800 Income before tax expense 9 100 Other Liabilities 23 400 Tax expense 3 600 Short-term Bank Loans 16 800 Net Income 5 500 Shareholders’ Equity + Total Liabilities 189 500 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Financial and Economic Ratios Company Industry Benchmark Current ratio 2.0 2.0 Debt/Total Assets 62.0% 60.0% Inventory Turnover 6.7 6.7 Collection Period 75.6 dias 35 dias Assets Turnover 1.7 2.9 Return on Sales 1.7% 1.2% Return on Assets 5.4% 7.4% Return on Equity 7.6% 8.3% Question: Based on the available information, analyze the financial and economic performance of the company using the industry average as the benchmark to identify possible management problems. Let’s take a look at the value of the ratios: The current ratio, which is a financial ratio, is exactly the same for the company and the industry benchmark (IB), so, everything seems fine. The debt to total assets ratios, used to measure the capital structure of the company, are very similar, but our company seems to have a higher percentage of debt, in comparison to the IB, thus, the financial leverage of the company is higher that the IB’s ones. In terms of inventory turnover is equal to the IB, so, everything looks fine in terms of this measure. In terms of collecting period, we have a very different collection period, being the value of our company very high when compared to the IB, almost the double. This means that in term of collecting money, our company is in a worst situation than IB, and this is a problem. The assets turnover (AT) is lower of our company than it is for the IB’s, this is probably because the receivable turnover is lower for our company than it is for the IB (Assets Turnover = Receivables Turnover + Inventory Turnover) (the higher the collection period, the lower the receivables turnover). ROS is higher for our company, in general the company in term of ROS, profit margin, the company is slightly better than the IB. so, everything is fine. But if we look at the ROA, this value is lower than the IB’s one. And we know that the ROA depends on the ROS but also on the AT. The problem is that the AT is much lower than what is for the IB. Our ROA is lower because we have a lower AT, which is justified by the higher collection period of the company. Finally, the ROE is also lower, as expected, because the ROE depends on the financial leverage of the company (our company is better, because we have more debt that IB), but also on the ROA (which is lower than it is for the IB) Summarizing, the company has a liquidity problem that is related to the collection period, that is very high when compared to the IB’s collection period. And this liquidity problem has an impact on the ROE (because it impacts the AT, which impacts the ROA, which impacts ROE). So, the problem is due to the collection period. Our advice is to the company to take care of this problem, that is, it needs to collect further information to understand the problem, to, hopefully, decrease the value of the CP. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASE – DIFFERENT INDUSTRIES Table 1 and Table 2 report common-size Balance Sheets and selected financial and economic ratios, respectively, for four different companies (A, B, C, and D) that operate in four different industries (trade of household appliances, supermarket chain, textile manufacturing, financial consulting). Table 1 – Balance Sheets (in percentage) Company A B C D Non-current Assets 62.5% 60.6% 12.0% 0.6% Inventories 6.8 19.3 0.0 17.2 Accounts Receivable 12.5 2.5 53.7 30.8 Other Receivables 3.2 1.1 3.2 8.4 Cash & Cash Equivalents 15.0 16.5 31.1 43.0 TOTAL ASSETS 100.0% 100.0% 100.0% 100.0% Shareholders’ Equity 34.9% 44.8% 68.0% 63.6% Long-term loans 32.4 29.0 0.0 0.0 Short-term loans 19.4 8.2 27.6 20.7 Accounts Payable 13.3 18.0 4.4 15.7 EQUITY+DEBT 100.0% 100.0% 100.0% 100.0% Table 2 – Financial and Economic Ratios Company A B C D Current Ratio 1.15 1.50 2.75 2.73 Quick Ratio 0.94 0.77 2.75 2.26 Inventory Turnover 19.6 16.8 NA 11.8 Collection Period 34 dias 3 dias 43 dias 55 dias Assets Turnover 1.34 3.50 4.47 2.02 Return on Assets 1.4% 9.3% 18.6% 16.5% Return on Sales 1.1% 2.7% 4.2% 8.2% Return on Equity 4.0% 20.8% 27.4% 26.0% Dividends/Net Income 0.0% 26.9% 25.5% 7.3% Total Assets/Equity 286.0% 223.3% 147.1% 157.2% Long-term Loans/Equity 92.5% 64.8% 0.0% 0.0% NA = Not available Question: Identify the industry of each of the companies A, B, C, and D. Give some of the reasons supporting each of your selections. We have 4 companies from 4 different industries. Consulting – C – this company has no inventories, this is a service company, so they don’t have inventory. They also have a relative high weight of AR. And in this type of business, we have a high collecting period, because the payment takes some time, and are done in a periodical way. Also, we have a high AT, and high return ratios, we have ROA, because we don’t have inventories. Supermarket – B – because, of the very low collection period (and accounts receivable, but they are related) (if it is a supermarket, consumers pay in cash, so the CP should be low). Also, high weight of non-current assets (because we have a lot of equipment). High AT and low ROS, the gross profit margin (ROS) in this type of business is typically low. Textile manufacturing – A – because this one has a big value of non-current assets (it has more equipment, to manufacture). Also, relatively high IT, low AT and low Return Ratios (comparing to D). Trade of Household appliances – D – because this one has a low value of non-current assets (comparing to A), since they business consists in trading. Relatively high weigh of AR (comparing to A). The CP is higher for company D (comparing to A), because, they are trading, and a lot of sales on credit, so it should be higher. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASE – ANALYSIS OF ROE The “Celbi” company3 was founded in 1965, in Leirosa, Figueira da Foz, and two years later began producing eucalyptus whitening paste for paper. Currently, it is 99.96% owned by the Swedish group Stora, and is its subsidiary since 1987. In 1998, Stora group merged with the Finnish group Enso, to form the StoraEnso group, the second largest paper producer in the world. Celbi’s resources are mainly directed towards two activities: Forestry: assuring great part of the main raw material used in its manufacturing process (around 40% of the global consumption); Industrial; the paste produced has various uses– decorative laminates, cigarette paper, photograph paper and tetra- pack packaging. Its products are mainly for export: of the 23.6 million in sales, 88% are to the EU market and 5% to other countries. It employs 466 workers, whose training the administration considers to be a priority aspect. Another major concern is the environment. “Celbi” is involved in several environmental management projects and is the only company in Portugal to have an oxygen reactor, exemplary of “green” technology. The water consumption and the emission of sulfur dioxide are areas that have also registered improvements. Based on the company’s Balance sheets and Income Statement (prepared for the purposes of analysis), reported in the appendix, the table presented below has been drawn up showing the Dupont Analysis of the Return on Shareholders’ Equity. Analyze and comment on the evolution of these indicators, for the three-year period(1997-1999). Company "Celbi, SA" Ratios 1997 1998 1999 1. Investment effect (1.1*1.2) 8.3% 4.5% 9.9% 1.1 EBIT/Sales 18.5% 11.4% 23.4% 1.2 Sales/Total Assets 0.45 0.39 0.42 2. Financing effect (2.1*2.2) 0.99 0.92 1.02 2.1 Total Assets/Shareholders' Equity 1.09 1.10 1.08 2.2 EBT/EBIT 0.90 0.84 0.94 3. Tax effect 0.93 0.78 0.76 3.1 Net Income/EBT 0.93 0.78 0.76 ROE (1*2*3) 7.6% 3.2% 7.7% Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Adjusted Financial Balance Sheets of "Celbi, SA" 1997 1998 1999 Assets Non-current assets 34824994 66% 35646627 67% 38514430 73% Intangible Assets 106367 0% 99932 0% 93497 0% Tangible Fixed Assets 21123146 40% 20035791 37% 26536981 46% Investments Securities 251208 0% 514058 1% 418712 1% Inventories 12206393 23% 11683402 22% 11227758 19% Other non-current assets 1137880 2% 3313444 6% 237482 0% Current assets 18210827 34% 18470065 35% 19344032 36% Inventories 3531676 7% 4229790 8% 3674401 7% Raw Materials 1649142 3% 2153390 4% 1912959 3% Work in progress 678452 1% 568446 1% 511938 1% Finished Products 1126595 2% 1405316 3% 1166259 2% Goods 77487 0% 102638 0% 83245 0% Receivables 3716019 7% 3599029 7% 4876886 9% Accounts Receivable 2746889 5% 2145083 4% 3887685 7% State 254591 0% 424304 1% 240985 0% Other receivables 714539 1% 1029642 2% 748216 1% Cash and Cash Equivalents 10963132 21% 10641246 20% 10792745 20% Bank deposits 10953960 21% 10634702 20% 10786138 19% Cash 9172 0% 6544 0% 6607 0% TOTAL ASSETS 53035821 100% 54116692 102% 57858462 109% Shareholders' equity Share Capital 15500000 29% 15500000 29% 15500000 27% Treasury Stocks -6712 0% -6712 0% -6712 0% Revaluation Reserves 9678398 18% 10890494 20% 10890494 19% Adjustments on Investment Securities 13317 0% 16753 0% 22974 0% Reserves 21437004 40% 21437004 40% 21437004 37% Other variations of shareholders' equity -481494 -1% -484810 -1% -526808 -1% Retained Earnings -1375191 -3% 470324 1% 2099878 4% Net Income 3693059 7% 1598094 3% 4097892 7% 48458381 91% 49421147 91% 53514722 92% Liabilities Non-current liabilities 514516 1% 169116 0% 215121 0% Bank loans 404516 1% 0 0% 0 0% Other long-term liabilities 0 0% 59116 0% 80121 0% Provisions 110000 0% 110000 0% 135000 0% Current Liabilities 4062924 8% 4526429 9% 4128619 8% Bank loans 619503 1% 0 0% 0 0% Accounts Payable 1087397 2% 1197973 2% 1388754 2% Other payables 283137 1% 138390 0% 242104 0% State 435292 1% 638555 1% 1120226 2% Other current liabilitiess 1475090 3% 1587726 3% 1003628 2% Provisions 162505 0% 963785 2% 373907 1% 4577440 9% 4695545 9% 4343740 8% TOTAL EQUITY + LIABILITIES 53035821 100% 54116692 100% 57858462 100% Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Income Statements of "Celbi, SA" 1997 1998 1999 REVENUES Sales 23755941 98% 21334231 94% 24423458 94% Services 2761 0% 25118 0% 15622 0% Change in Inventories (production) -946721 -4% -318292 -1% -656433 -3% Own work for the company 66595 0% 110520 0% 123658 0% Supplementary revenues 107642 0% 80369 0% 117448 0% Operating Subsidies 13436 0% 9315 0% 9789 0% Other Operating revenues 2292 0% 2 0% 287 0% 23001946 95% 21241263 94% 24033829 93% Financial revenues 626252 3% 653010 3% 380734 1% 23628198 98% 21894273 97% 24414563 94% Extraordinary revenues 512737 2% 781384 3% 1497216 6% TOTAL 24140935 100% 22675657 100% 25911779 100% COSTS Cost of goods sold 7619370 32% 7231464 32% 7245097 28% External Services and Supplies 5411742 22% 5617742 25% 5551544 21% Personnel Costs 3462752 14% 3316230 15% 3495742 13% Depreciation and amortization costs 2787043 12% 2972018 13% 3559592 14% Provisions 145041 1% 732285 3% 89580 0% Taxes 18229 0% 22552 0% 24194 0% Other Operating costs 21940 0% 31920 0% 17251 0% 19466117 81% 19924211 88% 19983000 77% Other Financial costs 5952 0% 72835 0% 71904 0% Interest Expense 437875 2% 386797 2% 346209 1% 443827 2% 459632 2% 418113 2% 19909944 82% 20383843 90% 20401113 79% Extraordinary costs 281132 1% 245265 1% 149274 1% 20191076 84% 20629108 91% 20550387 79% Income Tax 256800 1% 448455 2% 1263500 5% Net Income 3693059 15% 1598094 7% 4097892 16% TOTAL 24140935 100% 22675657 100% 25911779 100% Looking at the evolution of the ROE, we can see the ROE decreased strongly from 97 to 98, and increased a lot form 98 and 99. Over all, at the end of 99 the level ROE is very close to the level of ROE from 97. Let’s look at the reasons behind this behavior. The first item we can look at is related to the operating return on sales ratio. As we can see, this value decreased from 97 to 98, and increased a lot from 98 to 99. So, this manly explains the evolution of the ROE. In relation to the total assets turn over, is quite stable along 3 years, so the investment effect changed a lot, but that’s mainly because of the evolution of the ORS. In respect to the capital structure, if we look at the ratio Total Assets to Shareholders' Equity, and its evolution, we see that its evolution was quite stable, and very close to one, which means that the value of the equity is quite substantial in the capital structure of this company – the level of financial leverage is quite low, because the company is manly financed by equity. The overall financial effect is quite stable, so there was a significant change about this. In relation to the tax effect, we have some small changes. As we can see we are having a negative evolution from the tax effect (the company is paying more taxes), so, when we multiple the effects, this is making the ROE lower. In summary, if this company wishes to increase its ROA, it should try to use more debt, because if we look at the financing effect it is very close to 1. To use more debt, this value would increase. And by looking at the TA/SHE, we see that the company is manly financed by equity, so there is a lot of potential space to grow. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASE – FINANCIAL LEVERAGE AND ROE Roll Corporation’s return on net operating assets (𝑅𝑁𝑂𝐴 = 𝑁𝑂𝑃𝐴𝑇𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠) is 10% and its tax rate is 40%. Its net operating assets ($10 million) are financed entirely by common shareholders’ equity. Management is considering using bonds to finance an expansion costing $6 million. It expects return on net operating assets to remain unchanged. There are two alternatives to finance the expansion: a) Issue $2 million bonds with 5% coupon and $4 million common stocks b) Issue $6 million bonds with 6% coupon. Required: Note: The Present Net Operating Income After Tax and the Present Net Income will be the same, because the different because the NOIAT ant the NI is the interest expense, but if you don’t have any debt, you do not have any interest expense. So, if we compute NOIAT, we are also computing the NI. 1.1 Compute Roll’s Current Net Operating Income after Tax (NOPAT) and Net Income. 𝑁𝑂𝑃𝐴𝑇 = 𝑁𝐼 The return on net operating assets = 10% Net operating Income After Taxes/Operating Assets = NOIAT/10M=0,1 so, the NOIAT = 1M = NI 1.2 Determine Net Income and Net Operating Income after Tax for each alternative financing plan. Alternative A 2M in bonds (coupon rate 5%, the interest rate) + 4M in stock (no interest) Operating assets = 10M + 6M = 16M RNOA = 10% RNOA = NOIAT/Operating Assets 0,1=NOIAT/16 NOIAT = 1,6M (we have debt) NI = 1.6M (NOIAT) – [2M*0,05(1-40%) (interest expense, net of taxes)] = 1.54M ROE = NI/Equity = 1.54/(10+4(stock)) = 11% Alternative B 6M in bonds (coupon rate 6%, the interest rate) NOIAT = 1.6M NI = 1.6M – [6M*0.06(1-40%)] = 1.384M ROE = NI/Equity = 1.384/10 = 13.84% By comparing the ROE, the most interesting alternative is B, which will imply a higher ROE This is happening because of the financial leverage. The use ofdebt is increasing the ROE. From the SH point of view, alternative B is the better option. 1.3 Compute Return on Shareholders’ Equity (ROE) for each alternative (use ending equity). 1.4 Explain any difference in the ROE for the alternative plans computed in the previous question. What alternative do you recommend to management? Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASES – FINANCIAL STATEMENT ANALYSIS 1. Below you have the Balance Sheets and Income Statements of the company “Arroba” of the last three years as well as a table containing selected financial and economic ratios. Based on this information comment on the liquidity and solvency position of the company and on its profitability. Balance Sheets of “Arroba” N-2 N-1 N % % % ASSETS Non-Current Assets 407 534 63.5% 1 166 532 52.7% 1 200 324 47.6% Intangible Assets 1 745 0.3% 1 745 0.1% 1 745 0.1% Tangible Fixed Assets 475 398 74.1% 1 446 532 65.4% 1 720 106 68.2% Accumulated Depreciation - 69 609 -10.8% - 281 745 -12.7% - 521 527 -20.7% Current Assets 234 214 36.5% 1 044 944 47.3% 1 323 172 52.4% Inventories 0 0.0% 5 814 0.3% 6 105 0.2% Accounts Receivable 167 111 26.0% 479 323 21.7% 527 801 20.9% Other Receivables 15 579 2.4% 405 880 18.4% 643 454 25.5% State 25 051 3.9% 69 340 3.1% 53 243 2.1% Cash & Cash Equivalents 26 473 4.1% 84 587 3.8% 92 569 3.7% Total Assets 641 748 100% 2 211 476 100% 2 523 496 100% SHAREHOLDERS' EQUITY Share Capital 200 482 31.2% 560 482 25.3% 560 482 22.2% Reserves 0 0.0% 0 0.0% 18 062 0.7% Retained Earnings - 18 990 -3.0% - 306 011 -13.8% 37 171 1.5% Net Income - 287 021 -44.7% 361 244 16.3% 341 255 13.5% Total Equity - 105 529 -16.4% 615 715 27.8% 956 970 37.9% LIABILITIES Non-Current Liabilities 237 699 37.0% 723 266 32.7% 774 048 30.7% Bank Loans 237 699 37.0% 723 266 32.7% 774 048 30.7% Current Liabilities 509 578 79.4% 872 495 39.5% 792 478 31.4% Bank Loans 140 239 21.9% 145 759 6.6% 150 774 6.0% Accounts Payables 160 133 25.0% 267 628 12.1% 148 290 5.9% State 43 415 6.8% 98 879 4.5% 101 455 4.0% Other current liabilities 165 791 25.8% 360 229 16.3% 391 959 15.5% Total Liabilities 747 277 116.4% 1 595 761 72.2% 1 566 526 62.1% Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Income Statements of “Arroba” N-2 N-1 N % % % Revenues and Expenses Sales 0 0.0% 63 062 2.1% 66 215 2.0% Services 1 037 338 100.0% 2 912 325 97.9% 3 210 096 98.0% Cost of Goods Sold 0 0.0% - 15 230 -0.5% - 15 992 -0.5% External Services and Supplies - 408 764 -39.4% -1 460 924 -49.1% -1 589 611 -48.5% Personnel costs - 841 432 -81.1% - 874 557 -29.4% - 904 647 -27.6% Other operating revenues 0 0.0% 3 565 0.1% 4 795 0.1% Other operating costs - 3 410 -0.3% - 6 678 -0.2% - 1 005 0.0% EBITDA - 216 268 -20.8% 621 563 20.9% 769 851 23.5% Depreciation and Amortization Costs - 69 028 -6.7% - 212 136 -7.1% - 239 782 -7.3% Financial revenues 5 634 0.5% 6 088 0.2% 9 652 0.3% EBIT - 279 662 -27.0% 415 515 14.0% 539 721 16.5% Interest Expense - 6 013 -0.6% - 24 308 -0.8% - 37 875 -1.2% EBT - 285 675 -27.5% 391 207 13.1% 501 846 15.3% Income Tax - 1 346 -0.1% - 29 963 -1.0% - 160 591 -4.9% Net Income - 287 021 -27.7% 361 244 12.1% 341 255 10.4% Financial and Economic ratios of "Arroba" Ratio/Formula N-2 N-1 N Current Ratio Current Assets / Current Liabilities 0.46 1.20 1.67 Quick Ratio (Current Assets-Inventories)/Current Liabilities 0.46 1.19 1.66 Collection Period (Days) Accounts Receivable/(Sales+Services)*365 59 59 59 Accounts Payables Days Accounts Payable/(Sales+Services)*365 56 33 17 Inventories Days Inventories/Cost of Goods Sold*365 – 139 139 Assets Turnover (Sales+Services)/Total Assets 1.62 1.35 1.30 Long-term Financing to Non-current Assets Ratio Long-term Financing/Non-current Assets 0.32 1.15 1.44 Shareholders' Equity to Total Assets Ratio Shareholders' Equity/Total Assets -0.16 0.28 0.38 Shareholders' Equity to Total Liabilities Ratio Shareholders' Equity/Total Liabilities -0.14 0.39 0.61 Return on Sales (ROS) Net Income/(Sales+Services) *100 – 12.4% 10.6% Return on Assets (ROA) (Net Income+Interest Expense)/Total Assets*100 – 17.4% 15.0% Return on Equity (ROE) Net Income/Shareholders' Equity*100 – 58.7% 35.7% Common and horizontal analysis Since the level of inventories is low, this company, probably, provides service. The most important account in the total assets (highest weight) is tangible fixed assets, and even though its weight decreased, the absolute value increased over the years (the company’s investments in tangible fixes assets increased). Furthermore, the total equity of this company is negative in year N-2, so, this company, in this year, is insolvent. However, along the years, we see that the retain earnings increased and became positive in year N. Additionally, also the shared capital increased in absolute terms, which means that the company issued new stocks in year N-1, probably because of a restructuring plan. This plan may have also included obtaining long-term debt, since the absolute value of noncurrent liabilities increased a lot. Finally, it is also important to notice that the weight of current liabilities decreased a lot, over the years. Looking at the income statement, we can see that, while the value of sales is low, the value of services is really high and that almost tripled along the years, which confirms that this is a company who provides services. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 In year N-2, the most important account in the income statement is the personal cost (81% of sales); however, its weight decreased a lot in the following years. Most probably, in year N-2, the company was working below its capacity, that is, there were a lot of people working, but they weren’t contributing a lot for the generation of profit, which can be confirmed by the fact that the service’s value tripled, and the personal costs stayed relatively the same. We can also see that the interest expense is increasing along the years, what is expectable, because the long-term debt also increased over the years. Additionally, the weight of income tax is increasing, this being a consequence of previously registering losses, and now, profits. Finally, between years N-1 to N, the net income slightly decreased; however, the EBT increased. Therefore, the net income decreased because of the tax effect (negative tax effect). Liquidity (short term equilibrium) Analyzing the current ratio and quick ratio we see that they are really close to each other, which was expectable because this is a service company, so, it has no to little inventory. Additionally, we see that the both ratios improve along the years; however, they seem to be really low, specially on the late years (however, we can’t say much, because we don’t have the industry average, thus, this situation could be “normal”). The collection period is stable along the years (since we don’t have the Industry Benchmark, the analysis is limited). Accounts payable day decreased considerably along the years, which is negative, because it means that the company has to pay sooner, which puts pressure in terms of liquidity over the company, especially when the company’s CP is stable, because the evolution of the CP does not compensate the APD’s evolution. Since this is a service company, the inventory days is not relevant, so we should pay attention to this ratio. Finally, the assets turnover decreased along the year. And since the higher the turnover the better, this is not a good sign. However, we have a good reason for this to happen, and it is not a necessarily bad reason for this to happened, the value of assets increased, because the company made huge investments in fixed assets. (Probablythe AT will increase in the next years, because, the assets will hopefully make the income increase). Solvency (long term equilibrium) The Long-Term Financing to Non-current Assets ratio strongly increased along the years. Therefore, the company is moving from a situation of negative working capital, to a positive working capital (a ratio less than one means a negative WC, a ratio higher than one means positive WC), which is a good sign. Finally, the Shareholders’ Equity to Total Assets ratio was negative (because the equity was negative – insolvency situation) in year N-2, nut it increased and became positive, because equity turned positive, however, the value of this ratio is still very low, so, there is some room for improvement in this level. Summarizing, based on the analysis, we can conclude that after a bad year (N-2) the company somehow managed to recover and to improve its liquidity and solvency position. However, we should take note of the fact that (1) the company presents a relatively high level of dependency from its creditors, because the level of Shareholders’ Equity to Total Assets is still quite low, and (2) the company is under some pressure in terms of liquidity position driven by the decrease of the Accounts Payable Days (in the future, this might be a worrying situation for the company, if the CP stays stable, or if it increases). Economic analysis For year N-2, we don’t have values for profitability, because the equity was negative, so there was no interest in computing return on sales, assets or equity, because there is no return in the company. However, we verify considerable improvement from N-2 to N-1, from an insolvency position to positive and significant return ratios in years N-1 and N. Even though, all the return ratios decreased from N-1 to N. The company started to pay more taxes in year N, so, the net income (after taxes) decreased although the operating income increased. This decrease in return ratios is not really worrying, because it is cause by an increase in the tax payment, because the company started to registered higher values of operating income. 4. Prospective Analysis 4.1. The projection process 4.2. Forecasting financial statements 4.3. Applications of prospective analysis 4.4. Short-term financial planning and decisions: the cash budget, cash management, credit management, inventories management and sources of short-term financing. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASE – FINANCIAL STATEMENTS FORECAST 1. Comparative income statements and balance sheets for Coca-Cola4 are shown below ($ millions). Based on the additional information, prepare the projected income statement, the Balance sheet and the cash flow statement for year 3. Based on your initial projections, how much external financing (long-term debt and/or stockholders’ equity) will Coca-Cola need to fund its growth at projected increases in sales. Income Statement Year 1 Year 2 Year 3 (Forecast) Net Sales 19889 20092 Cost of goods 6204 6044 Gross Profit 13685 14048 Selling, general, and administrative expense 9221 7893 Depreciation and amortization expense 773 803 Interest expense (revenue) 292 -308 Income before tax 3399 5660 Income tax expense 1222 1691 Net Income 2177 3969 Outstanding shares 3481 3491 Balance sheet Year 1 Year 2 Year 3 (forecast) Cash 1892 1934 Receivables 1757 1882 Inventories 1066 1055 Other current assets 1905 2300 Total current assets 6620 7171 Property, plant, and equipment 6614 7105 Accumulated depreciation -2446 -2652 net property, plant, and equipment 4168 4453 Other noncurrent assets 10046 10793 Total assets 20834 22417 Accounts payable and accrued liabilites 3905 3679 Short-term debt and current maturities of long-term debt 4816 3899 Income tax liabilities 600 851 Total current liabilities 9321 8429 Deferred income taxes and other liabilities 1362 1403 Long-term debt 835 1219 Total noncurrent liabilities 2197 2622 Common stock 870 873 Capital surplus 3196 3520 Retained Earnings 18543 20655 Treasury stock -13293 -13682 Shareholders' equity 9316 11366 Total liabilities and equity 20834 22417 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Additional Information Sales growth 1.02% Gross profit margin 69.92% Selling, general, and administrative expense 39.28% Depreciation expense/prior year PPE gross 12.14% Interest expense/prior year long-term debt 5.45% Income tax expense/pretax income 29.88% Accounts receivable turnover 10.68 Inventory turnover 5.73 Accounts payable turnover 1.64 Taxes payable/tax expense 50.33% Total asset/Shareholders' equity (financial leverage) 2.06 Dividends per share 1.37 Capital expenditures/sales 5.91% Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Income Statement Additional Information Year 1 Year 2 Year 3 (Forecast) Sales growth 1,02% Net Sales 19 889 20 092 (1) 20 297 Gross profit margin 69,92% Cost of goods 6 204 6 044 (2) 6 105 Selling, general & administrative costs 39,28% Gross Profit 13 685 14 048 (3) 14 192 Depreciation expense/prior year PPE gross 12,14% Selling, general & administrative expense 9 221 7 893 (4) 7 973 Interest expense/prior year long-term debt 5,45% Depreciation and amortization expense 773 803 (5) 863 Income tax expense/pretax income 29,88% Interest expense (revenue) 292 -308 (6) 279 Income before tax 3 399 5 660 (7) 5 078 Income tax expense 1 222 1 691 (8) 1 517 Net Income 2 177 3 969 (9) 3 560 Outstanding shares 3481 3491 (1) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠2 × (1 + 𝑆𝑎𝑙𝑒𝑠 𝐺𝑟𝑜𝑤𝑡ℎ) = 20 092(1 + 1,02%) (3) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3 × 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 = 20 297 × 69,92% (2) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3 − 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡3 = 20 297 × 69,92% (4) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3 × 𝑆𝑒𝑙𝑙𝑖𝑛𝑔, 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 & 𝑎𝑑𝑚𝑖𝑛𝑖𝑠𝑡𝑟𝑎𝑡𝑖𝑣𝑒 𝑐𝑜𝑠𝑡𝑠 = 20 297 × 39,28% (5) 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑝𝑙𝑎𝑛𝑡, 𝑎𝑛𝑑 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡2 × 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒/𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟 𝑃𝑃𝐸 𝑔𝑟𝑜𝑠𝑠 = 7 105 × 12,14% (6) (𝐿𝑜𝑛𝑔-𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡2 + 𝑆ℎ𝑜𝑟𝑡-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 𝑎𝑛𝑑 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑙𝑜𝑛𝑔-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡2) × 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒/𝑃𝑟𝑖𝑜𝑟 𝑦𝑒𝑎𝑟 𝑙𝑜𝑛𝑔-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 = (1219 + 3899) × 12,14% (7) 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔, 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 & 𝑎𝑑𝑚𝑖𝑛𝑖𝑠𝑡𝑟𝑎𝑡𝑖𝑣𝑒 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠 = 14 192 − 7 973 − 863 − 279 (8) 𝐼𝑛𝑐𝑜𝑚𝑒 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 × 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒/𝑃𝑟𝑒𝑡𝑎𝑥 𝑖𝑛𝑐𝑜𝑚𝑒 = 5078 × 29,88% (9) 𝐼𝑛𝑐𝑜𝑚𝑒 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 − 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 5 078 − 1 517 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Balance Sheet Year 1 Year 2 Year 3 (Forecast) Additional Information Cash 1892 1934 (1) 302 Accounts receivable turnover (Sales/Accounts Receivables) 10,68 Receivables 1757 1882 (2) 1 900 Inventory turnover (Cost of goods/Inventories) 5,73 Inventories 1066 1055 (3) 1 066 Accounts payable turnover (Costs of goods/Accounts payable) 1,64 Other Current assets 1905 2300 (4) 2 300 Taxes payable/tax expense 50,33% Total current assets 6620 7171 (5) 5 568 Total assets/Shareholders equity 2,06% Property, Plant & Equipment 0 7105 (6) 8 305 Dividends per share 1,37 Accumulated depreciation -2446 -2652 (7) -3 515 Capital expenditures/sales 5,91% Net property, plan & equipment -2446 4453 (8) 4 790 Other noncurrent assets 10046 10793 (9) 10 793 Total non-current assets 7600 15246 (10) 15 583 Total assets 14220 22417 (11) 21 151 Accounts payable and accrued liabilities 3905 3679 (12) 3 723Short-term debt and current maturities of long-term debt 4816 3899 (13) 3 899 Income tax liabilities 600 851 (14) 764 Total current liabilities 9321 8429 (15) 8 385 Deferred income taxes and other liabilities 1362 1403 (16) 1 403 Long-term debt 835 1219 (17) 1 219 Total non-current liabilities 2197 2622 (18) 2 622 Common stock 870 873 (19) 873 Capital surplus 3196 3520 (20) 3 520 Retained Earnings 18543 20655 (21) 19 433 Treasury stocks -13293 -13682 (22) -13 682 Shareholders´s equity 9316 11366 (23) 10 144 Total Liabilities & Equity 20834 22417 (24) 21 151 (4), (9), (13), (16), (17), (19), (20), (22) 𝑉𝑎𝑙𝑢𝑒3 = 𝑉𝑎𝑙𝑢𝑒2 (2) 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 20 29710,68 (3) 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑3𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 6 1055,73 (5) 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠3 − 𝑇𝑜𝑡𝑎𝑙 𝑁𝑜𝑛𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠3 = 21 151 + 15 583 (1) 𝑇𝑜𝑡𝑎𝑙 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠3 − 𝑂𝑡ℎ𝑒𝑟 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠3 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠3 − 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠3 = 5 568 − 2 300 − 1 066 − 1 900 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 (6) 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑃𝑙𝑎𝑛𝑡 & 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡2 + (𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3 × 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒/𝑠𝑎𝑙𝑒𝑠) = 7 105 + (3 560 × 5,91%) (7) 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛2 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒3 = −2652 + (−863) (8) 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑝𝑙𝑎𝑛 & 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡3 + 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛3 = 8 305 + (−3 515) (10) 𝑁𝑒𝑡 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑝𝑙𝑎𝑛 & 𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡3 + 𝑂𝑡ℎ𝑒𝑟 𝑛𝑜𝑛𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠3 = 4 790 + 10 793 (11) 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 & 𝐸𝑞𝑢𝑖𝑡𝑦 (12) 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑3𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 6 1051,64 (14) 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒3 × 𝑇𝑎𝑥𝑒𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒/𝑡𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 = 1 691 × 50,33% (15) 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑎𝑛𝑑 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 + 𝑆ℎ𝑜𝑟𝑡-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 𝑎𝑛𝑑 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑙𝑜𝑛𝑔-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡3 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 = 3 723 + 3 899 + 764 (18) 𝐷𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝑜𝑡ℎ𝑒𝑟 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 + 𝐿𝑜𝑛𝑔-𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡3 = 1 403 + 1 219 (21) 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠2 + 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒3 − (𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠2 × 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒) = 20 655 + 3 560 − (3491 × 1,37) (23) 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘3 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑠𝑢𝑟𝑝𝑙𝑢𝑠3 + 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠3 + 𝑇𝑟𝑒𝑎𝑠𝑢𝑟𝑦 𝑠𝑡𝑜𝑐𝑘𝑠3 = 873 + 3 520 + 19 433 − 13 682 (24) 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝐸𝑞𝑢𝑖𝑡𝑦3 + 𝑇𝑜𝑡𝑎𝑙 𝑁𝑜𝑛𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 + 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 = 10 144 + 2 622 + 8 385 Statement of Cash Flows Year 3 (Estimate) Net Income 3 560 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒3 Depreciation 863 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒3 Accounts receivable - 18 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠2 − 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠3 = 1 882 − 1 900 Inventories - 11 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦2 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦3 = 1 055 − 1066 Accounts Payable 44 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑎𝑛𝑑 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠2 − 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑎𝑛𝑑 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 = 3 679 − 3 723 Interest expense - 279 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒3 Income taxes 87 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠2 − 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠3 Net cash flow from operations 4 629 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒+ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 = 3 560 − 863 − 18 − 11 + 44 − 279 + 87 CAPEX -1 200 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠/𝑠𝑎𝑙𝑒𝑠 × 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠3 = 5,91% × 3 560 Net cash flow from investing activities -1 200 𝐶𝐴𝑃𝐸𝑋 Interest expense -279 −𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 Dividends - 4 783 −(𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 × 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠2) = −(1,37 × 3 491) Net cash flow from financing activities - 5 062 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 = (−279) + (−4 783) Net change in cash - 1 632 𝑁𝑒𝑡 𝐶𝐹𝑂 + 𝑁𝑒𝑡 𝐶𝐹𝐼 + 𝑁𝑒𝑡 𝐶𝐹𝐹 = 4 629 + (−1 200) + (−5 062) Beginning cash 1 934 𝐶𝑎𝑠ℎ2 Ending cash 302 𝐵𝑒𝑔𝑔𝑖𝑛𝑖𝑛𝑔 𝑐𝑎𝑠ℎ + 𝑁𝑒𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑎𝑠ℎ = 1 934 + (−1 632) Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 2. The Financial Manager of a trading company of electronic equipment aims to estimate the financing needs for the next three months of the year N+1. Taking into account the additional information presented below help him in this task by preparing: 1. The Cash Budget (predicted receipts and the payments) for the first three months of year N+1. 2. The forecasted Balance Sheet and Income Statement at the end of March, N+1. (we should start with the IS) 3. Based on the projections, will the company need to obtain additional financing or will it generate cash surplus? Sales Year N Purchases Year N October 240 000 October 340 000 November 280 000 November 360 000 December 800 000 December 800 000 Sales Forecast Year N+1 Purchases Forecast Year N+1 January 400 000 January 200 000 February 160 000 February 80 000 March 160 000 March 80 000 Receipt from customers 20% cash and the remaining 80% in 30 days. Payment to suppliers fully in 60 days. Other expenses Salaries each month 120 000 Repayment of loans in March N+1 140 000 Payment of interest expenses in March N+1 60 000 Payment of Dividends in March N+1 200 000 Payment of income tax in February N+1 120 000 Depreciation of tangible fixed assets for the period January-March N+1 20 000 Beginning of period cash and cash equivalents (January 1, N+1) 200 000 Required cash and cash equivalents 100 000 2. * The expected Gross Margin is 50% of Sales Balance Sheet March N+1 December N Tangible Fixed Assets 600.000 600.000 Accumulated Depreciation Year N + Depre 1 st quarter = 120.000 -100.000 Inventories 1.200.000 1.200.000 Income Statement 1st Quarter N+1 Year N Sales 720.000 4.000.000 Cost of Goods Sold 360.000 2.600.000 Gross Margin 0.5*720.000 1.400.000* Depreciation and Amortization 20.000 60.000 Selling, General & Administrative expense 120.000 1.080.000 Interest Expense 60.000 60.000 Earnings before tax GM-Exp = -80.000 200.000 Income tax expense (33%) - 66.000 Net Income = EBT = -80.000 134.000 Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 Accounts Receivable 0.8*Sales March = 128.000 640.000 Cash and Cash Equivalents Requirement = 100.000 200.000 Total Assets 1.908.000 2.540.000 Shareholders' Equity SE N + Net income – Dividends = 60.000 340.000 Long-term bank loans 660.000 660.000 Accounts Payable Purchases of March + February = 160.000 1.160.000 Other current liabilities 40.000 40.000 Short-term bank loans Assets – Equity – the other liabilities = 908.000 Como não gera cash, the company will need to increase the short term bank loans, to cover the liquidity deficit 140.000 State debts SB N – paymentsIncome Tax = 80.000 200.000 Shareholders' Equity + Liabilities 1.908.000 2.540.000 1. Cash Budget Jan N+1 Feb N+1 Mar N+1 Receipts From customers 0.2*400.000Jan Sales + 0.8*800.000Dec Sales 0.2*160.000+0.8*40 0.000 0.2*160.000+0.8*16 0.000 Other receipts - - - Total receipts 720.000 352.000 160.000 Payments To suppliers 360.000Nov Purchases 800.000Dec Purchases 200.000Jan Purchases Salaries and other expenses 120.000 120.000 120.000 Loans repayment - - 140.000 Interestexpense - - 60.000 Dividends - - 200.000 Other payments - 120.000Tax - Total payments 480.000 1.040.000 720.000 (1) Balance of the period 720.000-480.000 352.000-1.040.000 160.000-720.000 (2) Beginning cash & cash equivalents 200 000 200.000+240.000 -560.000-248.000 End of period cash & cash equivalents (1+2) 200.000+240.000 Liquidity surplus -248.000 Liquidity deficit 808.000 Liquidity deficit 3. Yes, it will need to obtain financing, because it has a liquidity deficit in February and March. Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059 PRACTICAL CASES – CASH BUDGET 1. Below are presented important information on the planned activity of the company "Pine Mulch" for the second quarter of year N (amounts in m.u.). April Year N May Year N June Year N Sales 160000 140000 192000 Purchases 68000 64000 80000 Payments of: Salaries and other expenses 8000 7000 8400 Interest expenses 3000 3000 3000 Equipment purchase 50000 ------ 4000 The company forecasts that 10% of sales will not be collected (uncollectible accounts), 50% of sales will be in cash and the remaining 40% will be received in 30 days. Purchases from suppliers will be paid in 30 days. In March, year N, the sales were 180.000. REQUIRED: Use the available information to complete the cash budget presented below. Cash Budget April Year N May Year N June Year N Receipts From customers =0.9*(0.5*sales April+0.5*sales march) = 153.000 =0.9*(0.5*sales may+0.5*April sales) = 135.000 = 0.9*(0.5*june sales+0.5 may sales) = 149.400 Other receipts - - - Total receipts (1) 153.000 135.000 149.400 Payments To suppliers 65 000 Purchases april Purchases may Salaries and other expenses 8.000 7.000 84.000 Interest expense 3.000 3.000 3.000 Purchases of fixed assets 50.000 - 4.000 Total payments (2) = 126.000 = 78.000 = 79.400 Balance of the period (1-2) 27.000 57.000 70.000 Beginning cash and cash equivalents 200 000 227.000 284.000 End of period cash and cash equivalents 227.00 Liquidity surplus 284.000 Liquidity surplus 354.000 Liquidity surplus Descarregado por Alexandre (alexandrerbarradas@gmail.com) lOMoARcPSD|22243059
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