Lecture notes S2 L 3 - 1 Analyzing Investing Activities Main References Subramanyam and Wild Chapter 4 Palepu and Healy chapter 2 3&4 CFA Program

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1 1 Analyzing Investing Activities • Main References: – Subramanyam and Wild, Chapter 4 – CFA Program Curriculum, Levels I and II. 2 Key Concepts and objectives • Assets are defined as resources with probable future benefits. • Distortions may generally arise from ambiguities about whether: – The firm owns/controls the economic resource – Future economic benefits can be measured with reasonable certainty – Fair values are higher or lower than book values
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2 3 Key Concepts and objectives • The key objectives in analysing investing activities are as follows: – Analyse, adjust and interpret various kinds of assets and evaluate their relevance in analysis – Understand the importance of the following investing activities in analysing financial statements: • Accounts receivables • Inventory valuation methods • Plant assets and natural resources • Intangible assets – And be able to adjust any distortions in assets created by the above items in financial statement analysis 4 Key Concepts and objectives • Analyzing the investing aspect of the balance sheet for possible distortions allows the analyst to better understand the economic substance of a firm’s investing activities
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3 5 Current (Short-term) Assets Noncurrent (Long- term) Assets Resources or claims to resources that are expected to be sold, collected, or used within one year. Resources or claims to resources that are expected to yield benefits that extend beyond one year. Assets Classification 6 Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts. Current Asset Cash, Cash Equivalents and Liquidity
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4 7 Cash Equivalents Short-term, highly liquid investments that are: Readily convertible to a known cash amount. Close to maturity date and not sensitive to interest rate changes. Current Asset Cash, Cash Equivalents and Liquidity 8 Analysis of Cash and Cash Equivalents Companies risk a reduction in liquidity should the market value of short-term investments decline. Cash and cash equivalents are sometimes required to be maintained as compensating balances to support existing borrowing arrangements or as collateral for indebtedness
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5 9 Current Asset - Receivables Receivables are amounts due from others that arise from sale of goods or services, or loans of money Accounts receivable refer to oral promises of indebtedness due from customers Notes receivable refer to formal written promises of indebtedness due from others 10 Valuation of Receivables Receivables are reported at their net realizable value: • Total amount of receivables less provision for doubtful debt • Management estimates the provision for doubtful debt based on: • Experience • Customer fortunes • Economy and industry expectations • Collection policies
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6 11 Analyzing Receivables Assessment of earnings quality is often affected by an analysis of receivables and their collectibility
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This note was uploaded on 08/27/2011 for the course CORPFIN 7827 taught by Professor Prokim during the Three '11 term at University of Adelaide.

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Lecture notes S2 L 3 - 1 Analyzing Investing Activities Main References Subramanyam and Wild Chapter 4 Palepu and Healy chapter 2 3&4 CFA Program

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