Copyright Copyright 2002 by South-Western, a division of 2002 by South-Western, a division of Thomson Learning Thomson Learning TM TM Chapter 2 Chapter 2 Analysis of Solvency, Liquidity, Analysis of Solvency, Liquidity, and Financial Flexibility and Financial Flexibility Order Order Order Order Sale Sale Placed Placed Received Received < Inventory > < Receivable < Inventory > < Receivable Accounts Disbursement Accounts Disbursement < Payable > < Float < Payable > < Float Invoice Invoice Received Sent Received Sent
21
Embed
Chapter 2 Analysis of Solvency, Liquidity, and Financial Flexibility
Chapter 2 Analysis of Solvency, Liquidity, and Financial Flexibility. Order Order Sale Cash Placed Received Received Accounts Collection - PowerPoint PPT Presentation
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Chapter 2Chapter 2Analysis of Solvency, Liquidity, and Analysis of Solvency, Liquidity, and Financial FlexibilityFinancial Flexibility
OrderOrder Order Order Sale Sale CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Invoice Invoice Payment Payment CashCash Received Sent Received Sent PaidPaid
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Learning ObjectivesLearning Objectives
Differentiate between solvency and liquidity ratiosDifferentiate between solvency and liquidity ratios Conduct a liquidity analysisConduct a liquidity analysis Assess a firm’s financial flexibility positionAssess a firm’s financial flexibility position
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Financial Statements - Basic Source Financial Statements - Basic Source of Informationof Information
Balance SheetBalance Sheet
Income StatementIncome Statement
Statement of Cash FlowsStatement of Cash Flows
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Solvency MeasuresSolvency Measures
Current RatioCurrent Ratio
Quick RatioQuick Ratio
Net Working CapitalNet Working Capital
Net Liquid BalanceNet Liquid Balance
Working Capital RequirementsWorking Capital Requirements
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Current RatioCurrent Ratio
Current assetsCurrent assetsCurrent ratio = -------------------------Current ratio = ------------------------- Current liabilitiesCurrent liabilities
$6,339$6,339Current ratio = ----------- = 1.72Current ratio = ----------- = 1.72 $3,695$3,695
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Quick RatioQuick Ratio
Current assets - InventoriesCurrent assets - InventoriesQuick ratio = -------------------------------------Quick ratio = ------------------------------------- Current liabilitiesCurrent liabilities
$6,339 - $273$6,339 - $273Quick ratio = -------------------- = 1.64Quick ratio = -------------------- = 1.64 $3,695$3,695
DefinitionDefinition– Having enough financial resources to cover financial obligations Having enough financial resources to cover financial obligations
in a timely manner with minimal costsin a timely manner with minimal costs
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
What is Liquidity - ExamplesWhat is Liquidity - Examples
Amount and trend of internal cash flowAmount and trend of internal cash flow
Aggregate available credit linesAggregate available credit lines
Attractiveness of firm’s commercial paper and Attractiveness of firm’s commercial paper and other financial instrumentsother financial instruments
Overall expertise of managementOverall expertise of management
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Liquidity MeasuresLiquidity Measures
Cash Flow From OperationsCash Flow From Operations
Cash Conversion PeriodCash Conversion Period
Current Liquidity IndexCurrent Liquidity Index
LambdaLambda
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
Cash Flow From OperationsCash Flow From Operations
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
LambdaLambda
Initial liquid Total anticipated net cash flow Initial liquid Total anticipated net cash flow reserve + during the analysis horizonreserve + during the analysis horizon
Lambda = -------------------------------------------------------------------Lambda = -------------------------------------------------------------------Uncertainty about the net cash flow during theUncertainty about the net cash flow during theanalysis horizonanalysis horizon
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
.0765 x (1 - .00) x (1 + 2.3008).0765 x (1 - .00) x (1 + 2.3008) g = ------------------------------------------------- = 270.49%g = ------------------------------------------------- = 270.49% .3462 - [.0765 x (1 - .00)(1 + 2.3008)].3462 - [.0765 x (1 - .00)(1 + 2.3008)]calculation uses 1998 data to calculate the sustainable 1999 g.calculation uses 1998 data to calculate the sustainable 1999 g.
Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM
SolvencySolvency: an accounting concept comparing assets to : an accounting concept comparing assets to liabilitiesliabilities
LiquidityLiquidity: related to a firm’s ability to pay for its current : related to a firm’s ability to pay for its current obligations in a timely fashion with minimal costsobligations in a timely fashion with minimal costs
Financial flexibilityFinancial flexibility: related to a firm’s overall financial : related to a firm’s overall financial structure and if financial policies allow firm enough structure and if financial policies allow firm enough flexibility to take advantage of unforeseen opportunities.flexibility to take advantage of unforeseen opportunities.