BUS 320- chapter 5

what are two things to consider when assessing risk of investing

liquidity and solvency

liquidity

• does the company have short term 12 months) ability to pay off debt

• amount of time until an asset is converted to cash

solvency

ability to pay debts and related interest

limitations of the balance sheet

• assets and liabilities are stated at historical cost

• judgement and estimates are used in determining many of the items reported (soft numbers)

• leaves out items that cannot be recorded objectively

examples of soft numbers on balance sheet

• accounts receivable

• inventory

• PPE net of deprecation

• intangible assets (patents, copyrights)

• goodwill

monetary assets/liabilities

things settled in cash

• AR, cash, long term debt

non monetary assets/liabilities

value in monetary units is not fixed

• inventory, PPE, investments, intangibles, supplies

financial instruments

contracts that create a financial asset for one party and a financial liability/equity for the other

what is AR valued at

net realizable value (estimated selling price - estimated costs to prepare, complete and sell the asset)

how is goodwill attained

from buying another business

what is the valuation of goodwill

purchase price - fair value (unbiased value) of net assets

working capital

total current assets - total current liabilities

• net amount of relatively liquid resources

what are long-term liabilities all recorded at

the present value of future cash flows

what are the four components of shareholders’ equity

1. capital shares: authorized, issued and outstanding amounts

2. contributed surplus: amounts related to repurchased shares

3. retained earnings: undistributed earnings

4. accumulated other comprehensive income (IFRS)

contingency (ASPE)

existing situation with an uncertain profit or loss that will be resolved when a future event occurs or ail to occur

Provisions (IFRS)

liability that has an uncertain timing or amount

what is the purpose of the cash flow statement

assess a firm’s capacity to generate cash

• shows how we went from last year’s balance sheet to this year’s

operating activities

revenue producing activities

investing activities

acquisitions and disposals of long-term assets

financing activities

changes in the size and composition of borrowings and equity capital

free cash flow

net cash from operations - capital expenditures - dividends