Chapter 8, Problem 1BTN

1)

To determine

Introduction:

Cash and Cash Equivalents

• Cash and Cash equivalents are current assets that form part of the balance sheets and represent the liquid assets of the business. Liquid assets are assets that are readily convertible to cash.

• Cash and Cash Equivalents comprise of Cash and Bank Balances, Short term investments, Treasury Bills etc. Current Assets are assets that are convertible to cash in a period of one year or less.

• The cash flow statements explain the change in cash and cash equivalents of the business for the reporting period by tracking the changes in cash flows from Operating Activities, Investing Activities and Financing Activities for the reporting period.

To Determine:

Compare Cash and Cash equivalents with Current Assets as at December 31, 2013 well as with corresponding amounts with December 31, 2012.

Answer to Problem 1BTN

Solution:

$ Millions	2013	2012	Yearly Increase / (Decrease)
Cash and Cash Equivalents	$ 14,259	$ 10,746	$ 3,513
Current Assets	$ 73,286	$ 57,653	$ 15,633
Proportion of Cash and Cash Equivalents to Current Assets	19.46%	18.64%	0.82%

Explanation of Solution

• The Cash and cash equivalents consist of short term investments, cash and bank balances and other such current assets that are readily convertible to cash and are liquid in nature. The proportion of cash and cash equivalents to current assets defines the composition of the current assets, i.e. how much of the current assets consist of cash and non-cash current assets.

• Cash and Cash Equivalents have increased to $14,259 Million from $10,746 million indicating a year on year increase of $3,513 Million. The changes in the cash and cash equivalents are explained by the cash flow statements.

• Current Assets have increased to $73,286 Million from $57,653 Million indicating an increase of $15,633 Million year on year. This change in current assets comprises of changes in value of inventory, accounts receivables etc.

• Proportion of Cash and Cash Equivalents to Current Assets is calculated by dividing the cash and cash equivalents for the year by the total current assets. The proportion of cash and cash equivalents for the year by the total current assets for the year 2013 is 19.46% and for the year 2012 is 18.64% indicating an increase of 0.82%, despite the total value of current assets increasing.

• The increase in Cash and Cash Equivalents despite the increase in current assets indicates a favorable liquidity position since the increase in current assets corresponds to increase conversion of non-cash assets such as accounts receivable, inventory etc. to cash and cash equivalents.

Conclusion

Hence the Cash and Cash equivalents have been compared with Current Assets as at December 31, 2013 well as with corresponding amounts with December 31, 2012 and variances have been explained

2)

To determine

Introduction:

Cash and Cash Equivalents

• Cash and Cash equivalents are current assets that form part of the balance sheets and represent the liquid assets of the business. Liquid assets are assets that are readily convertible to cash.

• Cash and Cash Equivalents comprise of Cash and Bank Balances, Short term investments, Treasury Bills etc. Current Assets are assets that are convertible to cash in a period of one year or less.

• The cash flow statements explain the change in cash and cash equivalents of the business for the reporting period by tracking the changes in cash flows from Operating Activities, Investing Activities and Financing Activities for the reporting period.

To Determine:

Percentage change in beginning and ending amounts of cash and cash equivalents for the years 2012, 2013.

Answer to Problem 1BTN

Solution:

$ Millions	2013	2012
Cash and Cash Equivalents at the end of the year	$ 14,259	$10,746
Cash and Cash Equivalents at the beginning of the year	$ 10,746	$ 9,815
Change in Cash and Cash Equivalents during the year	$ 3,513	$ 931
Proportion of change in Cash and Cash Equivalents to Opening Values of cash and Cash Equivalents	32.7%	9.5%

Explanation of Solution

• The Cash and cash equivalents consist of short term investments, cash and bank balances and other such current assets that are readily convertible to cash and are liquid in nature. The proportion of cash and cash equivalents to current assets defines the composition of the current assets, i.e. how much of the current assets consist of cash and non-cash current assets.

• Cash and Cash Equivalents have increased to $14,259 Million from $10,746 million indicating a year on year increase of $3,513 Million in the year 2013. The changes in the cash and cash equivalents are explained by the cash flow statements.

• Cash and Cash Equivalents have increased to $10,746 million from $9,815 Million indicating a year on year increase of $981 Million in the year 2012. The changes in the cash and cash equivalents are explained by the cash flow statements.

• The percentage change in the proportion of change in Cash and Cash Equivalents to Opening Values of cash and Cash Equivalents is calculated by dividing the change in Cash and Cash Equivalents by Opening Values of cash and Cash Equivalents.

• The percentage change for the year 2013 is 32.7 % and for the year 2012 is 9.5%. There is a significant increase in the proportion of the cash and cash equivalents on a yearly basis indicating conversion of non-current assets to cash and cash equivalents.

• The increase in Cash and Cash Equivalents indicates a favorable liquidity position since it corresponds to increased conversion of non-cash assets such as accounts receivable, inventory etc. to cash and cash equivalents.

Conclusion

Hence the percentage changes in beginning and ending amounts of cash and cash equivalents for the years 2012, 2013 have been analyzed and explained.

3)

To determine

Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Days’ sales uncollected − A measure of the total outstanding collections for credit sales in number of days.

• It is a measure used by companies to calculate their average collection period and understand how well accounts receivables are being managed.

  $\text{Days sale uncollected = Accounts Receivable / Average Sales per Day}$

To Determine:

Days sales uncollected for Apple for the years 2013 and 2012.

Answer to Problem 1BTN

Solution:

$ Million	Apple
	2013	2012
Accounts Receivable	$ 13,102.00	$ 10,930.00
Net Sales	$ 170,910.00	$ 156,508.00
Average Sales Per Day	$ 468.25	$ 428.79
Days Sales Uncollected (Days)	27.98	25.49

Explanation of Solution

• Days Sales Uncollected is calculated as Accounts' Receivable / Average Sales per Day. In order to calculate the sales per day, Total sales for the year are divided by 365.

• Accounts Receivable has increased to $ 13,102.00 Million in the year 2013 from
  $10,930.00 Million in the year 2012. The yearly increase is $2,172 Million. Net Sales has increased to $ 170,910.00 in the year 2013 from $ 156,508 Million in the year 2012.
  The yearly increase is $14,402 Million

• The ratio of Days sales uncollected for Apple has increased from 25.49 days in the year 2012 to almost 28 days in the year 2013 indicating an increase in the days’ sales uncollected on a yearly basis. The change in percentage of Days sales uncollected of Apple year on year is 9.77% [ (27.98 − 25.49 ) / 25.49 x 100 ]

• A decrease in the day’s sales uncollected indicates an increase in the overall cash flow position as well as collection of accounts receivable outstanding as the ratio between accounts receivable and days’ sales uncollected is inverse i.e. an increase in days’ sales uncollected indicates a delay in collection of accounts receivable and vice versa.

Conclusion

Hence the Days sales Uncollected are calculated for the years 2013 and 2012.

4)

To determine

Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Days’ sales uncollected − A measure of the total outstanding collections for credit sales in number of days.

• It is a measure used by companies to calculate their average collection period and understand how well accounts receivables are being managed.

  $\text{Days sale uncollected = Accounts Receivable / Average Sales per Day}$

To Determine:

Days sales uncollected for Apple for the years 2014, 2013 and 2012.

Answer to Problem 1BTN

Solution:

$ Million		Apple
	2014	2013	2012
Accounts Receivable	$ 31,537.00	$13,102.00	$10,930.00
Net Sales	$182,795.00	$170,910.00	$156,508.00
Average Sales Per Day	$500.81	$468.25	$428.79
Days Sales Uncollected (Days)	365.00	27.98	25.49

Explanation of Solution

• Days Sales Uncollected is calculated as Accounts' Receivable / Average Sales per Day. In order to calculate the sales per day, Total sales for the year are divided by 365.

• Accounts Receivable has increased to $31,537 Million in the year 2014 from $ 13,102.00 Million in the year 2013. The yearly increase is $18,435 Million. Net Sales has increased to $ 182,795.00 in the year 2014 from $ 170,910 Million in the year 2013. The yearly increase is $11,885 Million

• The ratio of Days sales uncollected for Apple has increased from 27.98 days in the year 2013 to 365 days in the year 2014 indicating an increase in the days’ sales uncollected on a yearly basis. This adverse change is primarily due to the extraordinary increase in accounts receivable from the years 2014 and onwards.

• A decrease in the day’s sales uncollected indicates an increase in the overall cash flow position as well as collection of accounts receivable outstanding as the ratio between accounts receivable and days’ sales uncollected is inverse i.e. a decrease in days’ sales uncollected indicates a delay in collection of accounts receivable and vice versa.

Conclusion

Hence the Days sales Uncollected are calculated for the years 2014, 2013 and 2012.