Analyzing Investment Activities Week 3 – Part 2 Lecture date: 06/10/2016 FINA321 – Fall 2016 Abdullah Al Shukaili

Learning objective Define current assets and their relevance for analysis Explain cash management and its implications for analysis Analyze receivables, allowances for bad debts, and securitization

Review of concepts Assets are resources controlled by a company for the purpose of generating profit Current assets are resources readily convertible to cash within the operating cycle of the company Major classes of current assets include cash, cash equivalents, receivables, inventories, and prepaid expenses

Review of concepts Long-term (or noncurrent) assets are resources expected to benefit the company for periods beyond the current period. Major long-term assets include property, plant, equipment, intangibles, investments, and deferred charges

Operating Cycle An operating cycle is the amount of time from commitment of cash for purchases until the collection of cash resulting from sales of goods or services. It is the process by which a company converts cash into short-term assets and back into cash as part of its ongoing operating activities. Think about manufacture company !!

1- Cash and Cash Equivalents Cash equivalents are highly liquid, short-term investments that are (1) readily convertible into cash and (2) so near maturity that they have minimal risk of price changes due to interest rate movements. Examples of cash equivalents are short-term treasury bills, commercial paper, and money market funds.

1- Cash and Cash Equivalents Liquidity: the amount of cash or cash equivalents the company has on hand and the amount of cash it can raise in a short period of time provides flexibility to take advantage of changing market conditions and to react to strategic actions by competitors relates to the ability of a company to meet its obligations as they mature.

2- Receivables Accounts receivable: refer to amounts due to the company that arise from sales of products and services. OR amount which is still not paid to the company from customers

3- Securitization of Receivables Arises when the company sells all or a portion of its receivables to a third party which, typically, finances the sale by selling bonds to the capital markets The sale of receivables to a bank or commercial finance company

4- Prepaid Expenses Prepaid expenses are advance payments for services or goods not yet received. Examples are advance payments for rent, insurance, utilities, and property taxes.

Inventories Inventories are goods held for sale as part of a company’s normal business operations The inventory equation is useful in understanding inventory flows = Beginning inventories + Net purchases - Cost of goods sold = Ending inventories

The costs of inventories are initially recorded on the balance sheet. As the inventories are sold, these costs are removed from the balance sheet and flow into the income statement as cost of goods sold (COGS). Costs cannot be in two places at the same time; either they remain on the balance sheet (as a future expense) or are recognized currently in the income statement and reduce profitability to match against sales revenue.

Reading Text Book from pp.: 221 – 229 Notes given in the lecture