Analyzing The Balance Sheet

Question 1

Quick Ratio

Answer 1

Cash and Cash Equivalents + AR/Current Liabilities

Question 2

Alternative Ways of Thinking About Working Capital

Answer 2

A company’s current assets are the firms’s working assets
Current assets are those that consistanly recirclate
Capital means a source of funds for the company
Working equal the amount of current assets not support by current liabilities, but by long-term debt.

Question 3

What is working captial

Answer 3

The amount of a company’s long-term capital sources used to finance the company’s working assets.

Question 4

Two common reasons why companies have working captial

Answer 4

Inventory paid for but not sold

INventory sold but payment not yet collected.

Question 5

Distribution of Cash for Manufacturers

Answer 5

Despite the unpredictable timing of a product’s manufacture and sale. Manufactures have a similar need to maintain cash as retailers and wholesalers.

Question 6

Wholesalers and Retailers need for cash

Answer 6

They have less uncertainty regarding the timing of product sale and generally have shorter operating cycle, so their needs for cash reserve is possibly lower than for a manufacture. Uncertain cash flows equals need for cash.

Question 7

Law Firms Need for Cash

Answer 7

Large concentrations of cash likely means these firms are receiving retainers
Investing in marketable securities
Preparing to make year-end bonuses

Question 8

Accounts Receivable Manufactures and Wholesalers

Answer 8

Sell to businesses on credit, may offer terms to boost sales

Question 9

Retailers

Answer 9

Usually sell for cash or via national credit cards, so AR is small.
Have concentration of fixed assets for visible, high traffic locations.
Retailers that lease space will show lower fixed assets

Question 10

Law Firms and Other Service Companies

Answer 10

Cash and equivalents represent a higher portion of law firm’s assets than do receivables.

Question 11

Inventory Manufacturers

Answer 11

Most manufactures carry a substantial inventory. Levels vary according to length of manufacturing process. Manufacturers who own teir own facilities also have hevy fixed-asset investments. Retailer who lease facilities can also have high level of inventory.

Question 12

Wholesaler and Retailers

Answer 12

Wholesalers have more inventory than retailers do. Wholesailers have more than manufactures.

Question 13

Fixed Assets-Manufactuers

Answer 13

Manufacturers have a significant portion in fixed assets, not have much has Solid Waste Collection and Copy Shops

Question 14

Debt to Worth

Answer 14

Total Liabilities/Net Worth

Question 15

Tangible Net Worth

Answer 15

Net Worth - Tangible Assets

Question 16

Net Fixed/Tangible Net Worth

Answer 16

A ratio greater than one suggest that fixed assets are being financed by liabilities, which is less than ideal.

Question 17

Total Liabilities/Effective Net Worth

Answer 17

Total Liabilities-Subordinated/Net Worth + Subordinated Debt

Question 18

Liability Structure

Answer 18

The relationship between current liabilities, non-current liabilities, and net worth.

Question 19

Who are creditors

Answer 19

Loans from banks and other instituional lender have been a significant part of liability structure of companies with assets that are liquid or have a reliable market value.
Banks most likely to provide a high portion of financing to manufacturers, or wholesalers.