1. · 1 CORPORATE FINANCIAL REPORTING 8 - Reporting Working Capital

2. W ORKING C APITAL What is it? BALANCE SHEET ASSETS LIABILITIES & OWNERS’ EQUITY LIABILITIES CURRENT ASSETS CURRENT LIABILITIES NONCURRENT ASSETS NONCURRENT LIABILITIES OWNERS’ EQUITY 2Working Capital

3. W ORKING C APITAL What’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

4. C URRENT A SSETS Cash 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. 4Working Capital

5. C URRENT A SSETS Prepayments: includes prepaid rent, insurance, magazine subscriptions, salaries, etc. Deferred Income Taxes: later (chapter 11) Marketable Securities: later (chapter 12) 5Working Capital

6. C URRENT A SSETS I NVENTORY 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 6Working Capital

7. I NVENTORY Whose Inventory is it? Our Our Supplier Company 7Working Capital

8. I NVENTORY What is Inventory’s Cost? All costs of acquiring the inventory and getting it ready for sale. 8Working Capital

9. I NVENTORY 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 9Working Capital

10. I NVENTORY 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) 10Working Capital

11. I NVENTORY 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). 11Working Capital

12. I NVENTORY What is Inventory’s Cost? NOVEMBER: Company sells 10 finished desks for $300 each. 12Working Capital

13. I NVENTORY Perpetual vs. Periodic Methods 13Working Capital

14. I NVENTORY Cost Flow Assumptions Your new company does the following: Monday: buys 2 units @ $6/unit Wednesday: buys 2 units @ $9/unit Friday: buys 2 units @ $12/unit Saturday: sells 4 units for $20/unit Sunday you ask: What was my gross profit last week? How much is my inventory today? 14Working Capital

15. I NVENTORY 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? 15Working Capital

16. I NVENTORY Estimating Inventory Today 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.” 16Working Capital

17. I NVENTORY - Estimating Inventory Last 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 17Working Capital

18. I NVENTORY Fairly Common “Trick” Managers Use 18Working Capital

19. C URRENT L IABILITIES 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. 19Working Capital

20. W ORKING C APITAL ? 20Working Capital