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

2. 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

3. 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

4. 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

7. 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 !!

8. 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.

9. 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.

10. 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

11. 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

12. 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.

13. 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

14. 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.

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