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CORPORATE FINANCIAL REPORTING

8 - Reporting Working Capital

WORKING CAPITALWhat is it?BALANCE SHEET

ASSETS LIABILITIES & OWNERS’ EQUITY LIABILITIES

CURRENT ASSETS CURRENT LIABILITIES

NONCURRENT ASSETS NONCURRENT LIABILITIES

OWNERS’ EQUITY

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WORKING CAPITALWhat’s included?

CURRENT ASSETS CURRENT LIABILITIES

Cash & Cash Equivalents Accounts payable Receivables Accrued liabilities Prepayments Notes & interest payable Inventory Deferred income taxes Marketable Securities Income taxes payable Deferred income taxes Warranty Liabilities

Restructuring Liabilities

3Working Capital

CURRENT ASSETSCash and cash equivalents:

Cash represents money immediately available to management to spend for “anything”; including foreign currency translated at the exchange rate on the balance sheet date.

Cash equivalents are short-term highly liquid investments that have these two characteristics: - readily convertible into known amounts of cash and - so near their maturity that there is insignificant risk of changes in value because of changes in interest rates.Generally, only investments with original maturities of three months or less meet the definition.

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CURRENT ASSETS

Prepayments: includes prepaid rent, insurance, magazine

subscriptions, salaries, etc.

Deferred Income Taxes: later (chapter 11)

Marketable Securities: later (chapter 12)

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CURRENT ASSETSINVENTORY

I. Acquisition Whose inventory is it? What is inventory’s cost?

II. Sale Perpetual vs. Periodic

III. Valuation (measurement) Cost flow assumption Lower of cost or market (LoCoM)

IV. Estimating inventory

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INVENTORY

Whose Inventory is it?

Our Our

Supplier Company

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INVENTORY

What is Inventory’s Cost?

All costs of acquiring the inventory and getting it ready for sale.

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INVENTORY

What is Inventory’s Cost?OUR COMPANY BUILDS DESKS:

IN SEPTEMBER: CO. BUYS SOME LUMBER, COST $4,000

(enough for 80 DESKS)

CO. PAYS $100 DELIVERY CHARGE

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INVENTORY

What is Inventory’s Cost?OCTOBER: Employee starts work on ½ of the wood (40

desks). The company rents tools for $100/month. Employee uses $30 worth of sandpaper. Employee uses $40 worth of fasteners. Factory uses $200 of utilities. Administrative offices use $100 of utilities.

(continued)

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INVENTORY

What is Inventory’s Cost?OCTOBER: Employee uses $180 of finishing material. Depreciation of factory $400. Depreciation of administrative offices $150. Company pays factory employee $2,000. Company pays president $8,000. Company pays office staff $3,000. Employee finishes ½ of the desks (20 desks).

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INVENTORY

What is Inventory’s Cost?

NOVEMBER: Company sells 10 finished desks for $300

each.

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INVENTORY

Perpetual vs. Periodic Methods

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INVENTORY

Cost Flow Assumptions

Your new company does the following:Monday: buys 2 units @ $6/unitWednesday: buys 2 units @ $9/unitFriday: buys 2 units @ $12/unitSaturday: sells 4 units for $20/unit

Sunday you ask:What was my gross profit last week?How much is my inventory today?

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INVENTORY

Lower of Cost or Market (LoCoM or LCM)You are interested in investing in Company X that has the following on its latest financials:

Sales Revenue $1,200,000

Cost of goods sold exp. ( 400,000)

Gross profit $ 800,000

Inventory $ 20,000

For how much do you think they will sell their inventory?

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INVENTORY

Estimating InventoryToday your company’s warehouse burns down and your boss asks you to calculate the amount of inventory destroyed in the fire. You immediately call the accountant who says: “I don’t know - we use the periodic method. But, I can tell you this, sales so far this year are $210,000 and purchases were $46,000 - oh, and I’ll fax you last year’s income statement.”

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INVENTORY - Estimating InventoryLast Year’s Income Statement

Sales revenue $400,000

COGS expense:

Beginning inv. 10,000

Purchases 76,000

Goods avail. 86,000

Ending inv. ( 6,000)

Cost of goods sold ( 80,000)

Gross profit 320,000

Other expenses ( 200,000)

Income before taxes 120,000

Tax expense ( 36,000)

Net income $ 84,000

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INVENTORY

Fairly Common “Trick” Managers Use

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CURRENT LIABILITIES

Accounts Payable: what company owes for unpaid inventory.

Accrued Liabilities: lots of things – wages, utilities, rent, etc.

Notes & Interest Payable: owes for money borrowed and interest on loans.

Income Taxes Payable: we know.Restructuring Liabilities: anticipated

costs.Warranty Liabilities: matching principle.

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WORKING CAPITAL

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