Lecture 5

Question 1

Reformulating in the balance sheet

2. What is the treatment of cash that has been converted into trade notes. What a happens if these trade notes are given to customers
3. What is the treatment of debt instruments
4. What is the treatment of long term equity investments
5. What is the treatment of short term equity investments. How does this treatment change if used to invest excess cash

Answer 1

2. If trade notes are temporary investments of cash they should be treated as financial assets.
3. Debt instruments should be treated as financial assets for non-financial firms
4. Long term equity instruments should be treated as operating assets (investing in the operations of another firm)
5. Short term equity investments if part of a trading portfolio treat them as operating assets. If bought to use excess cash treat them as financial assets

Question 2

What is the treatment of

4. Common dividend payable
5. Preferred stock
6. Minority interest, how does this affect an equation

Answer 2

Common Dividends payable: Should be treated as part of shareholders equity not as a liability

preferred stock: Treat them as financial obligations

Minority interest “non-controlling interest”. Not a financial obligation not an equity, but to be treated separately as and addition to the following equations.

NOA = NFO + CSE + Minority interest

Question 3

2. How do analyst analyze the performance of the firms.

What is the comparative analysis referred to as

4. Explain common size analysis and how does the income statement and balance sheet get affected through this metrics.
5. Explain how a time series analysis works

Answer 3

2. To evaluate the performance of the firms, analysts usually need a benchmark to compare the performance of the firm.

The benchmark could be other firms (usually in the same industry), this comparative analysis is called cross-sectional analysis

4. Common size analysis gives a ready comparison most suitable for cross sectional analysis:

The income statement:
Each item / total revenues

The balance sheet:
each item / total assets

3. Analysts could do a time series analysis by comparing the performance of the firm in a particular year relative to its performance in prior years.

Question 4

What is the formula for cash dividends

What is in the formula for change in dividends payable

Answer 4

cash dividends = Dividends declared - change in dividends payable

Dividends payable at the end of the period - dividends payable at the begging of the period