These questions are basic financial statement analysis questions and not related
ID: 2806818 • Letter: T
Question
These questions are basic financial statement analysis questions and not related to specific company. Thus answers should be in general. 1.Company reported significant increaase in long-term investments in balance sheet. Identify possible reasons for this increase and what analyst should take into account when analysing these changes. 2.Company reported significant increase in operating income. More detailed analysis revealed this increase was increased by considerable change of other operating income. Assess these changes and company's ability to expand its business in the future. 3/Company reported significant increase in working capital. Identify possible reasons for the increase and assess whether it is positive change for the company. 4. Asess how utility of profitibilaty ratios is affected by the fact that they are based on book values of capital and profits meausered on accrual basis. 5.Company reported negative cash flow on operating activity and positive on financial and investment activities. Identify possible reasons for mentioned balances of cash flows.
Revision: I. Company reported significant increase in long-term investments in balance sheet Identify possible reasons for this increase and what analyst should take into account when analysing these changes. 2. Company reported significant increase in operating income. More detailed analysis revealed that this increase was caused by considerable change of other operating income. Assess these changes and company's ability to expand its business in the future.Explanation / Answer
Answer:
1. Long Term Investments: There are following reasons for increase in long term investment:
a. When company is expanding its existing plant capacity to manufacture new product in existing market.
b. When company is penetrating into new market with existing product portfolio or with new product portfolio.
c. When company is acquiring a new business to enter new market or acquire new client base.
According to analysts, all these investments are a source of increase in cash flows to the company in near future leading to improved valuation in long term in case synergy is matched.
2. Other Incomes include investments in short term marketable securities. These investments are a source of cash flow for the company which may be utilised in case of liquidity issues. These investments clearly inform analysts about the liquidity position of an organization in meeting their day to day operations and other cash requirements. Increase in Other Incomes inform about good cash flow for the company which improves the liquidity position as well as efficiency of management in parking their idle cash into return generating assets.
3. Working Capital = Current Assets - Current Liabilities. Increase in working capital is due to increase in current assets or decrease in current liabilities. It also indicates more inventory or more credit sales or payment of cash to suppliers. It is important to understand the cash conversion cycle to access the impact of Increase or Decrease.
4. Accounting is on Accrual Basis. Revenue and Expenses are recognized when incurred and there is a difference in the timing of cash receipt and product delivered or services rendered. All the assets which generate economic benefits in some future date are reported on historical costs. In this way, the profitability ratios are accessed on book value and accrual basis.
5. Operating Cash Flow is defined as: After Tax Net Income + Depreciation + Change in Working Capital. Increase in Working Capital is outflow of cash which is considered as negative and Decrease in Working Capital is inflow which is positive. Hence, Net Operating Cash Flow may be negative.
However, Investing Activities include investment in Property, Plant and Equipment which may be financed through Debt or Equity. Hence, sum of investing activities & financing activities shall be positive through raising of debt in proportion of investment.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.