Chapter 9, Problem 1BTN

1)

To determine

Introduction:

Accounts receivable:

• Accounts receivable are current assets that are indicative of the amount of outstanding collectibles owing to credit sales made during the reporting period.

• Current assets are assets that are convertible to cash within a period of one year or less. Current assets signify cash flows being utilized in procurement of assets such as inventory.

• The accounts receivable are the amount of credit sales outstanding and receivable for the reporting period. A high value of accounts receivable is indicative of cash flows being blocked.

To Determine:

Apple’s Accounts Receivable as on September 28, 2013.

Answer to Problem 1BTN

Solution:

Apple’s Accounts Receivable as on September 28, 2013 are $13,102 Million.

Explanation of Solution

• Analysis of the financial statements of Apple for the year 2013, indicate the value of Accounts Receivable as on September 28, 2013 to be $13,102 Million.

• Accounts receivable are current assets and are listed on the assets side of the balance sheet since they have a debit balance and signify the value of outstanding receivables owing to credit sales effected during the reporting period.

Conclusion

Hence the accounts receivable for Apple have been listed.

2)

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:

• Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times.

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

To Determine:

Accounts receivable turnover ratio for Apple

Answer to Problem 1BTN

Solution:

Accounts receivable turnover ratio for Apple is 7.67%

Explanation of Solution

$ Million	2013
Accounts Receivable	$ 13,102.00
Net Sales	$ 170,910.00
Accounts Receivable Turnover	7.67 %
( Accounts Receivable / Turnover x 100)

• A clear reading of the financial statements indicates that the Accounts Receivable is $ 13,102.00 Million and Net Sales for the year is $ 170,910.00 million.

• Accounts Receivable Turnover is calculated as Accounts Receivable / Turnover x 100 and hence Accounts Receivable Turnover is $ 13,102 / $ 170,910 x 100 = 7.67%

Conclusion

Hence the accounts receivable ratio is calculated.

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	2013
Accounts Receivable	$ 13,102.00
Net Sales	$ 170,910.00
Average Sales Per Day	$ 468.25
Days Sales Uncollected (Days)	27.98

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 is $ 13,102.00 Million in the year 2013 and Net Sales is $ 170,910.00 in the year 2013

• 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 year 2013

4)

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 Liabilities as on September 28,2013 as well as September 29,2012.

Answer to Problem 1BTN

Solution:

$ Millions	2013	2012	Yearly Increase / (Decrease)
Cash and Cash Equivalents	$14,259	$10,746	$3,513
Current Liabilities	$43,658	$38,542	$5,116
Proportion of Cash and Cash Equivalents to Current Assets	32.66%	27.88%	4.78%

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 Liabilities have increased to $43,658 Million from $38,542 Million indicating an increase of $5,116 Million year on year. This change in current Liabilities comprises of changes in value of expenses, accounts payables etc.

• Proportion of Cash and Cash Equivalents to Current Liabilities is calculated by dividing the cash and cash equivalents for the year by the total current Liabilities. The proportion of cash and cash equivalents for the year by the total current Liabilities for the year 2013 is 32.66% and for the year 2012 is 27.88% indicating an increase of 4.78%, despite the total value of current Liabilities increasing.

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

Conclusion

Hence the Cash and Cash equivalents have been compared with Current Liabilities as at September 28, 2013 well as with corresponding amounts with September 29, 2012 and variances have been explained.

5)

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:

Criteria to classify Cash and Cash equivalents

Answer to Problem 1BTN

Solution:

A clear reading of the supplementary information to the financial statements indicates that the Criteria to classify Cash and Cash equivalents is that the instruments must have maturity date of 3 months or less from the date of purchase.

Explanation of Solution

• Cash and Cash Equivalents are short term current assets comprising 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.

• Cash and Cash Equivalents comprise of the liquid investments of the business and are an indicator of the liquidity position of the business.

• Higher the Cash and Cash Equivalents, higher is the business’ liquidity and ability to repay short term debts and financial obligations.

Conclusion

Hence the Criteria to classify Cash and Cash equivalents have been identified.

6)

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:

• Accounts receivable turnover − A measure of the relation between the turnover and accounts receivable measured in number of times.

• It seeks to measure the relation of the credit sales in proportion to the total turnover and is an indicator of how much of the receivables are blocked due to credit sales.

  $\text{Accounts Receivable Turnover Ratio = Turnover / Accounts Receivable}$

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:

• Accounts receivable turnover ratio for Apple for year 2014

• Compare Cash and Cash equivalents with Current Liabilities as on September 28, 2014 as well as September 28, 2013.

Answer to Problem 1BTN

Solution:

• Accounts receivable turnover ratio for Apple for year 2014 is 9.55%

• Cash and Cash equivalents compared to Current Liabilities as on September 28, 2014 is

Explanation of Solution

$ Million	2014
Accounts Receivable	$ 17,460.00
Net Sales	$ 182,795.00
Accounts Receivable Turnover	9.55 %
( Accounts Receivable / Turnover x 100)

• A clear reading of the financial statements indicates that the Accounts Receivable for 2014 is $17,460 Million as compared to $ 13,102.00 Million in 2013 and Net Sales for the year is $182,795 Million in 2014 as compared to $ 170,910.00 million in 2013.

• Accounts Receivable Turnover is calculated as Accounts Receivable / Turnover x 100 and hence Accounts Receivable Turnover is $ 17,460 / $ 182,795 x 100 = 9.55%

$ Millions	2014	2013	Yearly Increase / (Decrease)
Cash and Cash Equivalents	$13,844	$14,259	($415)
Current Assets	$63,448	$43,658	$19,790
Proportion of Cash and Cash Equivalents to Current Assets	21.82%	32.66%	-10.84%

Explanation:

• 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 decreased to $13,844 Million in 2014 from $14,259 Million in 2013 indicating a year on year decrease of $415 Million. The changes in the cash and cash equivalents are explained by the cash flow statements.

• Current Liabilities have increased to $63,448 Million from $43,658 Million in 2013 indicating an increase of $19,790 Million year on year. This change in current Liabilities comprises of changes in value of expenses, accounts payables etc.

• Proportion of Cash and Cash Equivalents to Current Liabilities is calculated by dividing the cash and cash equivalents for the year by the total current Liabilities. The proportion of cash and cash equivalents for the year by the total current Liabilities for the year 2014 is 21.82% and 2013 is 32.66% indicating an decrease of 10.84%.

• The decrease in Cash and Cash Equivalents despite the increase in current Liabilities indicates a unfavorable liquidity position since the increase in current Liabilities corresponds to decrease conversion of non-cash Liabilities such as accounts payable, accrued expenses etc. to cash and cash equivalents.

Conclusion

Hence the figures of accounts receivable turnover and cash and cash equivalents to current liabilities for the years 2014 have been calculated and variances are explained.