1. Management of Working Capital
Accounting ratios

2. Primary Types of Financial Statements
Balance Sheet
A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
Income Statement
A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.

3. Basket Wonders’ Balance Sheet (Asset Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
Cash $ Acct. Rec.c Inventories Prepaid Exp d
Accum Tax Prepay Current Assetse $1,195
Fixed Assets
Less: Acc. Depr.g (329)
Net Fix. Assets $ 701
Investment, LT
Other Assets, LT Total Assetsb $2,169
a. How the firm stands on a specific date.
b. What BW owned.
c. Amounts owed by customers.
d. Future expense items already paid.
e. Cash/likely convertible to cash within 1 year.
f. Original amount paid.
g. Acc. deductions for wear and tear.

4. Basket Wonders’ Balance Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
Notes Payable $ 290
Acct. Payablec
Accrued Taxes d Other Accrued Liab. d Current Liab. e $ 500
Long-Term Debt f 530 Shareholders’ Equity
Com. Stock ($1 par) g 200
Add Pd in Capital g 729 Retained Earnings h Total Equity $1,139
Total Liab/Equitya,b $2,169
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year.
f. Debts payable > 1 year.
g. Original investment.
h. Earnings reinvested.

5. Basket Wonders’ Income Statement
Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007a
Net Sales $ 2,211 Cost of Goods Sold b ,599
Gross Profit $
SG&A Expenses c EBITd $
Interest Expensee EBT f $
Income Taxes EATg $
Cash Dividends
Increase in RE $
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
c. Sales comm., advertising, officers’ salaries, etc.
d. Operating income.
e. Cost of borrowed funds.
f. Taxable income.
g. Amount earned for shareholders.

6. For Basket Wonders December 31, 2007
Liquidity Ratios
Current
Current Assets
Current Liabilities
For Basket Wonders December 31, 2007
Balance Sheet Ratios
Liquidity Ratios
Shows a firm’s ability to cover its current liabilities with its current assets.
$1,195
$500
= 2.39

7. Liquidity Ratio Comparisons
Current Ratio
Year
2007
2006
2005
BW Industry
Ratio is stronger than the industry average.

8. For Basket Wonders December 31, 2007
Liquidity Ratios
Acid-Test (Quick)
Current Assets - Inv
Current Liabilities
For Basket Wonders December 31, 2007
Balance Sheet Ratios
Liquidity Ratios
Shows a firm’s ability to meet current liabilities with its most liquid assets.
$1,195 – $696
$500
= 1.00

9. Liquidity Ratio Comparisons
Acid-Test Ratio
Year
2007
2006
2005
BW Industry
Ratio is weaker than the industry average.

10. Summary of the Liquidity Ratio Comparisons
Ratio BW Industry
Current
Acid-Test
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
Note that this industry has a relatively high level of inventories.

11. Current Ratio – Trend Analysis Comparison
Trend Analysis of Current Ratio
1.5
1.7
1.9
2.1
2.3
2.5
2005
2006
2007
Analysis Year
Ratio Value BW
Industry

12. Acid-Test Ratio – Trend Analysis Comparison
Trend Analysis of Acid-Test Ratio
0.5
0.8
1.0
1.3
1.5
2005
2006
2007
Analysis Year
Ratio Value BW
Industry

13. Summary of the Liquidity Trend Analyses
The current ratio for BW has been rising at the same time the acid-test ratio has been declining.
The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventories are a significant problem for BW.

14. Activity Ratios Receivable Turnover Income Statement/ Balance Sheet
Annual Net Credit Sales
Receivables
For Basket Wonders December 31, 2007
Income Statement/
Balance Sheet
Ratios
(Assume all sales are credit sales.)
Activity Ratios
Indicates quality of receivables and how successful the firm is in its collections.
$2,211
$394
= 5.61

15. Activity Ratios Avg Collection Period Income Statement/ Balance Sheet
Days in the Year
Receivable Turnover
For Basket Wonders December 31, 2007
Income Statement/
Balance Sheet
Ratios
Activity Ratios
Average number of days that receivables are outstanding.
(or RT in days)
365
5.61
= 65 days

16. Activity Ratio Comparisons
Average Collection Period
BW Industry
Year
2007
2006
2005
BW has improved the average collection
period to that of the industry average.

17. Activity Ratios Payable Turnover (PT) Income Statement/ Balance Sheet
Annual Credit Purchases
Accounts Payable
For Basket Wonders December 31, 2007
Income Statement/
Balance Sheet
Ratios
(Assume annual credit
purchases = $1,551.)
Activity Ratios
Indicates the promptness of payment to suppliers by the firm.
$1551
$94
= 16.5

18. Activity Ratios PT in Days Income Statement/ Balance Sheet Ratios
Days in the Year
Payable Turnover
For Basket Wonders December 31, 2007
Income Statement/
Balance Sheet
Ratios
Activity Ratios
Average number of days that payables are outstanding.
365
16.5
= 22.1 days

19. Payable Turnover in Days BW has improved the PT in Days.
Activity Ratio Comparisons
Payable Turnover in Days
Year
2007
2006
2005
BW Industry
BW has improved the PT in Days.
Is this good?

20. For Basket Wonders December 31, 2007
Activity Ratios
Inventory Turnover
Cost of Goods Sold
Inventory
For Basket Wonders December 31, 2007
Income Statement/
Balance Sheet
Ratios
Activity Ratios
Indicates the effectiveness of the inventory management practices of the firm.
$1,599
$696
= 2.30

21. Inventory Turnover Ratio BW has a very poor inventory turnover ratio.
Activity Ratio Comparisons
Inventory Turnover Ratio
Year
2007
2006
2005
BW Industry
BW has a very poor inventory turnover ratio.