CH04 - Chapter 4 Analyzing Investing Activities Current vs....

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MBAD 7090 Chapter 4 Analyzing Investing Activities Page 1 of 13 Chapter 4 Analyzing Investing Activities Current vs. Long-Term (Noncurrent Assets) Current Assets Cash and other assets that can be converted into cash within one year or the operating cycle of the company o Operating Cycle Cash - > Inventory -> Receivable -> Cash Cycle o Examples: Cash, Short-Term Investments, Accounts and Notes Receivable, Inventory and Prepaid Expenses Long-Term Assets Assets that are expected to benefit the company for more than one year o Examples: Property, Plant and Equipment, Long-Term Investments, and Intangible Assets Financial vs. Operating Assets Financial Assets Marketable securities and other investments in nonoperating assets Operating Assets Assets consumed or used in the operating activities of the business
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MBAD 7090 Chapter 4 Analyzing Investing Activities Page 2 of 13 Current Assets Cash and Cash Equivalents Cash amounts held on deposit or available for deposit Cash Equivalents Short-term, highly liquid investments that are (1) readily convertible into cash and (2) so near maturity that they have minimal interest rate risk (typical maturities of 90 days or less) Pay attention to any restrictions on cash balances Receivables Accounts Receivable arise from selling products and services to customers on credit Notes Receivable arise from customer transactions and other sources always involve a written promise to pay and typically include interest Receivables are valued at their net realizable value the value of cash that is expected to be collected Gross receivable are adjusted down for uncollectible accounts, cash discounts available and customer returns, if material Analyzing Receivables - Credit Risk the risk that you will not be able to collect a receivable. Due to this risk you should always examine: o Consider adequacy of the allowance for doubtful accounts both across time and with other companies in the same industry o Consider accounts receivable turnover in the same way o Consider changes in the mix of receivables and in the types of customers that are being given credit
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MBAD 7090 Chapter 4 Analyzing Investing Activities Page 3 of 13 Inventory Goods held for sale in the ordinary course of business Recorded at cost Lower of Cost or Market Rule Inventory Equations: o Beginning Inventory + Purchases = Cost of Goods Available for Sale o Cost of Goods Sold + Ending Inventory = Cost of Goods Available for Sale o So BI P COGS = EI The value of the ending inventory is determined by your cost flow assumption Inventory Cost Methods and Cost Flow Assumptions Date Event Quantity $/Unit 1/1 Beginning Inventory 1,000 4.10 1/10 Purchase 800 5.00 1/20 Purchase 1,200 6.00 1/25 Sale 1,100 Units Available for Sale = 1,000 + (800 + 1,200) Units Available for Sale = 3,000 Ending Inventory = Units Available for Sale
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CH04 - Chapter 4 Analyzing Investing Activities Current vs....

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