The financial cash flows present a more accurate picture of the company since it accurately reflects interest cash flows as a financing decision rather than an operating decision. The expansion plans look like they are probably a good idea. The company was able to return a significant amount of cash to its shareholders during the year, but a better use of these cash flows may have been to retain them for the expansion.
This decision will be discussed in more detail later in the book. Both current assets cash and current liabilities account payable would be reduced by the same amount but the current ratio increases. If the bank loan is a current liability then both the current assets and current liabilities will be reduced by the same amount but the current ratio increases. However, if the bank loan is long—term debt then the current ratio would decrease because of the reduction in current assets. It takes PVI an average of Short—term Solvency Ratios Current ratio for Current ratio for Quick ratio for Quick ratio for Cash ratio for Cash ratio for Asset Management Ratios Total asset turnover Inventory turnover using ending figure Inventory turnover using average Receivables turnover using ending figure Receivables turnover using average.
Each student answer will be different depending on the industry and firm selected. Suggest preparing a current example for demonstration. The student should look at the financial position of the firm in relation to the industry as well as the trend, over time, in each of the five main categories of ratios. An overall statement on the financial position and recommendations should be encouraged. Consequently, many professors do not have a separate lecture on Chapter 2.
To the extent that this is a finance course, go over topics that may not have been emphasized in the required accounting course, including financial cash flows and financial statement analysis. A handout listing the financial ratios discussed in Appendix 2A is provided at the end of the lecture notes. It is more convenient to have the ratios in a handout during class discussions. The Financial Statements [PowerPoint slides 2—3 to 2—29] Review the balance sheet and income statement of the Canadian Composite Company from the text.
Financial Cash Flows [PowerPoint slides 2—20 to 2—29] The primary objective of this chapter is to encourage students to focus on cash flow rather than accounting profit. The Financial Cash Flows in Table 2. It consists of net changes in net working capital, net changes in fixed assets, and cash flows from operations.
For the Canadian Composite Corporation: Cash flow of the firm Operating cash flow Earnings before interest and taxes plus depreciation minus taxes Capital spending Acquisitions of fixed assets minus sales of fixed assets Additions to net working capital Total Cash flow to investors in the firm Debt Interest plus retirement of debt minus long—term debt financing Equity Dividends plus repurchase of equity minus new equity financing Total For rapidly growing firms, total cash flow to assets is often negative because of heavy capital expenditures.
Sources and uses of cash are discussed in more depth in Chapters 3 and Financial Statement Analysis — Appendix 2A [PowerPoint slides 2—30 to 2—53] The remaining powerpoint slides go though the calculations of the ratios with examples of what the results might mean. In reviewing the slides with the class, it is a good idea to walk through the calculations for Canadian Composite at the same time and discuss what the results for this company mean.
Cash Flow versus Accounting Profit As an illustration of why cash flow is more important than accounting income, we sometimes present the Canadian Composite Income Statement on an accrual accounting basis and then on a cash flow basis. Supplemental Bibliography Lindenberg, E. Millions discover their favorite reads on issuu every month. Principal compon ent analysis is a mu ltidimensional analysis technique which has as a main purpose.
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