3 Working Capital Minus Current Assets Current Liabilities Net short-term investment needed to carry on day-to-day activitiesComputedMinusCurrent AssetsCurrent Liabilities2
4 Working Capital Issues Inconsistencies in the measurements of its componentsDifferences of opinion over what should be included as the elementsLack of precision in defining the elementsParticularly with respect to the terms “liquidity” and “current”2
5 Purpose of the ChapterExamine the foundation of the working capital conceptReview the concept and its components as currently understoodIllustrate how the adequacy of a company’s working capital can be evaluatedDiscuss possible modifications3
6 Development of the Working Capital Concept Fixed vs. circulating capitalThe double-account systemCreditor vs. investor point of viewLiquidity as the basis for asset classification on the balance sheetWill be vs. could beAnson Herrick and ARB No. 3 - the operating cycleCurrent usage - indication of liquidity and degree of protection to short-term creditors4
7 Components of Working Capital ARB No. 43Definition of working capitalExamples of current assets and current liabilitiesAffirmed in No. 115 (FASB ASC 330)6
8 Temporary Investments Current AssetsCashCash equivalentsTemporary investmentsAlternative methodsHistorical costFair valueLower of cost or marketSFAS No. 12Why adoptedProblems with SFAS No. 12Temporary investments under SFAS No. 115 (FASB ASC 320)Trading securitiesAvailable-for-sale securitiesHeld-to- maturity securitiesTransfer between categoriesTemporary Investments7
10 Current Liabilities Payables Current Maturities Payables Deferrals Current maturities of long-term debtCurrent MaturitiesPayables9
11 Financial Analysis of a Company’s Working Capital Position How do liquidity problems occur?Evaluate with ratio analysis
12 Working Capital Problems with its use Current Assets Current LiabilitiesProblems with its use
13 Working Capital Hershey Current Assets Liabilities Working Capital 2011$2,046,558-$1,173,775=$872,7832010$2,005,2171,298,845706,372Tootsie RollCurrentAssetsLiabilitiesWorkingCapital2011$212,201-58,355=$153,8462010$235,16758,505$176,662Working Capital for both companies’ has worsened, although Tootsie Roll is in a better position in both years, with respect to this metric alone.
15 Current Ratio Hershey 2011 $2,046,558 $1,173,775 = 1.74:1 2010 $2,005,217$1,298,8451.54:1Tootsie Roll2011$212,201$ 58,355=3.64:12010$235,167$ 58,5054.02:1The current ratio for both companies is worsening.Tootsie Roll’s current ratio is better than Hershey’s for both years.
16 Acid Test (Quick) Ratio Cash + Marketable Securities + ReceivablesCurrent liabilities
17 Acid Test (Quick) Ratio Hershey2011$693, ,499$1,173,775=0.93:12010$884, ,061$1,298,8450.98:1Tootsie Roll2011$78, , ,895$58,355=2.25:12010$115, , ,996$58,5052.76:1Quick ratio is worsening for both companies.Tootsie Roll’s quick ratio is significantly better than Hershey’s for both years.
18 Cash Flow from Operations to Current Liabilities Net cash provided from operating activitiesAverage current liabilities
19 Cash Flow from Operations to Current Liabilities Hershey2011$580,867($1,173, ,298,845) /2=0.47:12010$901,423($1,298, ,628) /20.82:1Tootsie Roll2011$50,390($58, ,505) /2=0.86:12010$825,805($58, ,628) /21.45:1This metric is deteriorating for both companies.
20 Receivables Accounts receivable turnover ratio Days in receivables Net Credit SalesAverage Accounts Receivable365Accounts Receivable Turnover Ratio
21 Accounts Receivable Turnover Ratio Hershey2011$6,080,788($399, , ,061,+ 15,200) /2=14.842010$5,671,009($390, , , ,700) /213.64Tootsie Roll2011$528,369($41, , , ,531) /2=12.802010$492,742($37, , , ,356) /213.13This metric is improving for both Hershey but worsening for Tootsie Roll.
22 Days in Receivables Ratio Hershey201136514.84=24.60201013.6426.75Tootsie Roll201136512.80=28.51201013.1327.81
23 Inventory Turnover Ratio Average days in inventoryCost of Goods SoldAverage Inventory365Inventory Turnover Ratio
24 Inventory Turnover Ratio Hershey2011$3,548,896($648, ,622) /2=6.00200$3,255,801($533, ,712) /26.18Tootsie Roll2011$365,255($42, , , ,236) /2=5.692010$349,334($35, , , ,817) /26.18This metric is worsening for both companies.Both companies turned their inventory at approximately the industry average.
25 Days in Inventory Hershey 2011 365 6.00 = 60.81 2010 6.18 59.04 Tootsie Roll20113655.69=64.1720106.1859.05
26 Accounts Payable Accounts payable turnover ratio Average days payables outstandingInventory PurchasesAverage Accounts Payable365Accounts Payable Turnover Ratio
27 Accounts Payable Turnover Ratio (Nordstrom) 2011$6,592 – 201($ ) /2=7.712010$5,897 – 49($ ) /27.57This metric is worsening for Nordstrom.
28 Days in payables outstanding (Nordstrom) 20113657.71=47.2 days20107.5748.2 days
29 Summary of Hershey’s Working Capital Position Customers pay accounts receivable in approximately 25 days.Inventory remains on hand for approximately 61 days.Current operations are generating sufficient cash to repay current liabilities.
30 Summary of Tootsie Roll’s Working Capital Position Accounts receivable are paid in approximately 29 days.Inventory remains on hand for approximately 64 days.Current operations are generating sufficient cash to repay current liabilities.
31 International Accounting Standards The IASC has issued pronouncements on the following issues affecting working capital:Revised IAS No. 1, “Presentation of Financial Statements”presentation of current assets and current liabilitiesIAS No. 39, “Financial Instruments: Recognition and Measurement”IAS No. 2 , “Inventories”
32 IAS No. 1The IASC did not attempt to deal with the valuation issues discussed earlier in the chapterDiscussed two views of current assets and current liabilities:A measure of liquidityIdentification of circulating resources and obligationsSince these views are contradictory, it has lead to classifications of items by conventionAllows, but does not require, companies to decide whether or not to sub-classify assets and liabilities as currentFASB staff review indicated that it was quite similar to U. S. GAAP
33 IAS No. 25Allows investments classified as current to be accounted for by market value or LCMValue may be determined individually, by investment category, or on a total portfolio basisPreference for the total portfolio or investment category methods
34 IAS No. 2Objective of inventory reporting is to determine proper amount of cost to recognize as an assetSpecific identification method preferredIf not feasible, FIFO or weighted average preferredRevised IAS No. 2: LIFO is no longer allowedInventory must be written down to net realizable value on item-by-item basis