Management of Working Capital Accounting ratios

Income Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Income Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity. Balance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity. Primary Types of Financial Statements

a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. c d Cash $ 90 Acct. Rec. c 394 Inventories 696 Prepaid Exp d 5 Current Assets e $1,195 Accum Tax Prepay 10 Current Assets e $1,195 f Fixed Assets f 1030 g Less: Acc. Depr. g (329) Net Fix. Assets $ 701 Investment, LT 50 Total Assets b $2,169 Other Assets, LT 223 Total Assets b $2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007 a Basket Wonders’ Balance Sheet (Asset Side)

a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested. a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested. Notes Payable $ 290 c Acct. Payable c 94 d d Current Liab. e $ 500 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e $ 500 f Long-Term Debt f 530 Shareholders’ Equity g Com. Stock ($1 par) g 200 g h Total Equity $1,139 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity $1,139 Total Liab/Equity a,b $2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007 Basket Wonders’ Balance Sheet (Liability Side)

a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., advertising, officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., advertising, officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. b Net Sales $ 2,211 Cost of Goods Sold b 1,599 Gross Profit $ 612 c SG&A Expenses c 402 EBIT d $ 210 f Interest Expense e 59 EBT f $ 151 Income Taxes 60 EAT g $ 91 Cash Dividends 38 Increase in RE $ 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007 a Basket Wonders’ Income Statement

Current Current Assets Current Liabilities For Basket Wonders December 31, 2007Current Current Assets Current Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios $1,195$ = 2.39 Liquidity Ratios

BW Industry BW Industry Year Current Ratio Ratio is stronger than the industry average. Liquidity Ratio Comparisons

Acid-Test (Quick) Current Assets - Inv Current Liabilities For Basket Wonders December 31, 2007 Acid-Test (Quick) Current Assets - Inv Current Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios $1,195 – $696 $ = 1.00 Liquidity Ratios

BW Industry BW Industry Year Acid-Test Ratio Ratio is weaker than the industry average. Liquidity Ratio Comparisons

Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. Note that this industry has a relatively high level of inventories. RatioBWIndustry RatioBWIndustry Current Acid-Test Summary of the Liquidity Ratio Comparisons

Trend Analysis of Current Ratio Analysis Year Ratio Value BW Industry Current Ratio – Trend Analysis Comparison

Trend Analysis of Acid-Test Ratio Analysis Year Ratio Value BW Industry Acid-Test Ratio – Trend Analysis Comparison

industryThe current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. inventories BWThis indicates that inventories are a significant problem for BW. industryThe current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable. inventories BWThis indicates that inventories are a significant problem for BW. BWThe current ratio for BW has been rising at the same time the acid-test ratio has been declining. Summary of the Liquidity Trend Analyses

Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007 Receivable Turnover Annual Net Credit Sales Receivables For Basket Wonders December 31, 2007 Indicates quality of receivables and how successful the firm is in its collections. Income Statement/ Balance Sheet Ratios Activity Ratios $2,211$ = 5.61 (Assume all sales are credit sales.) Activity Ratios

Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2007 Avg Collection Period Days in the Year Receivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Income Statement/ Balance Sheet Ratios Activity Ratios days = 65 days Activity Ratios

BW Industry BW Industry Year Average Collection Period BW has improved the average collection period to that of the industry average. Activity Ratio Comparisons

Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2007 Payable Turnover (PT) Annual Credit Purchases Accounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1551$ = 16.5 (Assume annual credit purchases = $1,551.) Activity Ratios

PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2007 PT in Days Days in the Year Payable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Income Statement/ Balance Sheet Ratios Activity Ratios days = 22.1 days Activity Ratios

BW Industry BW Industry Year Payable Turnover in Days BW has improved the PT in Days. Is this good? Activity Ratio Comparisons

Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2007 Inventory Turnover Cost of Goods Sold Inventory For Basket Wonders December 31, 2007 Indicates the effectiveness of the inventory management practices of the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1,599$ = 2.30 Activity Ratios

BW Industry BW Industry Year Inventory Turnover Ratio BW has a very poor inventory turnover ratio. Activity Ratio Comparisons