Professional Documents
Culture Documents
ABC Company
Balance Sheet
As of December 31, 19xx
Assets:
Current Assets
Current Liabilities
Accounts payable
Accounts receivable
Notes Payable
Inventory
Total Current Assets
Fixed Assets:
Gross fixed assets
Common Stock
Goodw ill
Paid-in-capital
Retained Earnings
Total Equity
Total Liabilities & Equity
Working Capital
Working Capital includes a firms current assets,
which consist of cash and marketable securities in
addition to accounts receivable
and inventories. It also consists of current liabilities,
including accounts payable (trade credit), notes
payable (bank loans), and accrued liabilities.
Net Working Capital is defined as total current assets
less total current liabilities. Often called working
capital.
Policy A
Policy B
Policy C
Current Assets
25,000
50,000
Liquidity Analysis
Policy
Liquidity
A
High
B
Average
C
Low
Greater current asset levels generate more
liquidity; all other factors held constant.
Profitability Analysis
Return on Investment =
Net Profit
Total Assets
Current Assets = (Cash + Rec. + Inv.)
Return on Investment =
Net Profit
Current + Fixed Assets
Policy
Profitability
A
Low
B
Average
C
High
As current asset levels decline, total
assets will decline and the ROI will
rise.
Impact on Risk
Decreasing cash reduces the firms ability to
meet its financial obligations. More risk!
Stricter credit policies reduce receivables and
possibly lose sales and customers. More risk!
Lower inventory levels increase stockouts and
lost sales. More risk!
Policy
Risk
A
Low
B
Average
C
High
Risk increases as the level of current assets
are reduced.
Liquidity
High
Average
Low
Profitability Risk
Low
Low
Average
Average
High
High
low
return
Current
Assets
Net Working
Capital > 0
Current
Liabilities
Long-Term
Debt
low
cost
high
cost
high
return
Fixed
Assets
Equity
highest
cost
low
return
Current
Assets
high
return
Fixed
Assets
Current
Liabilities
Net Working
Capital < 0
low
cost
Long-Term
Debt
high
cost
Equity
highest
cost
CCC :
(inventory period + accounts receivable
period) accounts payable period.
Inventory period = average inventory
annual CGS/365
A/R period =
average A/R
annual credit sales/365
A/P period =
average A/P
annual credit purchases/365
Waktu
Amount
Month
Amount
January
$ 2,000,000 July
$ 12,000,000
February
$ 2,000,000 August
$ 14,000,000
March
April
$ 4,000,000 October
$ 5,000,000
May
$ 6,000,000 November
$ 4,000,000
June
$ 9,000,000 December
$ 3,000,000
Accounts Receivable
Management
Contribution margin
A/R turn over
Total variable costs
present
$ 240,000
12.2 x
$ 360,000
proposed
$ 252,000
8.1 x
$ 378,000
Investment in A/R
Cost of fund
Bad debt expenses
$ 29,508
$ 4,426
$ 6,000
$ 46,667
$ 7,000
$ 12,600
Credit Terms
Credit terms: the terms of sale for customers
who have been extended credit by the firm.
Cash discount: a percentage deduction from
the purchase price; available to the credit
customer who pays its account within a
sepcified period.
Cash discount period: the number of days
after the beginning of the credit period during
which the cash discount is available.