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Working Capital Analysis Guide

This document summarizes key aspects of working capital from a textbook. It defines working capital as the net short-term funds available for day-to-day business operations. Components of working capital include current assets like cash, receivables, inventory minus current liabilities. Various ratios are used to analyze companies' working capital positions and liquidity, such as current ratio, acid-test ratio, receivables and inventory turnover ratios. Calculations of these ratios for Hershey and Tootsie Roll are provided as examples.

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Hardy Sorialam
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117 views13 pages

Working Capital Analysis Guide

This document summarizes key aspects of working capital from a textbook. It defines working capital as the net short-term funds available for day-to-day business operations. Components of working capital include current assets like cash, receivables, inventory minus current liabilities. Various ratios are used to analyze companies' working capital positions and liquidity, such as current ratio, acid-test ratio, receivables and inventory turnover ratios. Calculations of these ratios for Hershey and Tootsie Roll are provided as examples.

Uploaded by

Hardy Sorialam
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 8

WORKING
CAPITAL

Prepared by Willy - 0321902001


What is Working Capital
Schroeder, Clark & Cathey “Financial Accounting Theory and Analysis”.
Eleventh Edition, Wiley & Sons, 2014

◼ Net short-term investment needed to carry on


day-to-day activities
◼ Computed

Minus

Current Assets Current Liabilities


The Working Capital Concept –
Why ..…
◼ Fixed Capital & Circulating Capital
◼ Liquidity as the basis for asset
classification on the balance sheet
◼ Usefullness Creditor & investor point of view
◼ Current usage - indication of liquidity and degree of
protection to short-term creditors
Components of
Working Capital
Current Assets
◼ Cash
◼ Cash equivalents
◼ Temporary investments
◼ Receivables
❑ Categories

◼ Trade
Current Liabilities
Temporary
◼ Nontrade ▪Payables
Investments
◼ Inventories ▪Deferrals
◼ Prepaids ▪Current maturities of long-term debt
Financial Analysis of a Company’s
Working Capital Position

◼ How do liquidity
problems measured … ?
◼ Evaluate with ratio
analysis
Working Capital
Hershey
Current Current Working
Assets Liabilities Capital
2017 $2,001,910 - $2,076,543 = $(74,633)
2016 $1,816,778 - 1,909,443 = (92,655)

Tootsie Roll
Current Current Working
Assets Liabilities Capital
2017 $270,920 - 63,788 = $207,132
2016 $299,300 - 63,561 = $235,739

Working Capital Hershey Negative but Increase


Working Capital Tootsie Roll Positive but Decrease
Current Ratio
Hershey
2,001,910
2017 2,076,543 = 0,96:1

1,816,778
2016 = 0.95:1
1,909,443
Current assets
Tootsie Roll
Current liabilities
270,920
2017 63,788 = 4.25:1

299,300
2016 = 4.71:1
63,561

The Average Current Ratio for Companies in the Sugar & Confectionary
Products Industry is 4.6
Acid Test (Quick) Ratio
Cash + Marketable Securities + Receivables
Current liabilities

Hershey
$380,179 + 588,262
2017 $2,076,543 = 0.47:1

$296,967 + 581,381
2016 = 0.46:1
$1,909,443

Tootsie Roll

$96,314 + 416 + 41,606 + 47,354


2017 $63,788 = 2.91:1

$119,145 + 382 + 67,513 + 42,964


2016 = 3.62:1
$63,561

The Industry Average Acid Test Ratio is 3.5


Accounts Receivable Turnover Ratio
Net Credit Sales
Average Gross Accounts Receivable

Hershey
$7,515,426
2017 ($588,262 + 41,792 + 581,381,+ 40,153) /2 = 12.01

$7,440,181
2016 = 11.87
($581,381 + 40,153 + 599,073 + 32,638) /2

Tootsie Roll
$519,289
2017 ($47,354 + 1,921 + 42,964 + 1,884) /2 = 11.03

$521,100
2016 = 10.63
($42,964 + 1,884 + 51,010 + 2,225) /2
Industry Average Ratio is 16.40
Days in Receivables Ratio
365
Average Accounts Receivable

Hershey
Average Ratio 38.40 365
2017 12.01 = 30.39

365
2016 = 30.75
11.87
Tootsie Roll
365
2017 11.03 = 33.09

365
2016 10.63 = 34.34
Inventory Turnover Ratio
Cost of Goods Sold
Average Inventory

Hershey
$4,070,907
2017 ($752,836 + 745,678) /2 = 5.43

$4,282,290
2016 = 5.72
($745,678 + 750,970) /2

Tootsie Roll
$326,896
2017 ($22,905 + 31,922 + 22,900 + 34,631) /2 = 5.82
Avg. Ratio 5.4 (2017)

$321,309
2016 = 5.36
($22,900 + 34,631 + 27,231 + 35,032) /2
Average Days in Inventory
365
Inventory Turnover Ratio

Hershey
365
2017 5.43 = 67.22

365
2016 = 63.81
5.72

Tootsie Roll
365
2017 5.82 = 62.71

365
2016 = 68.10
5.36
End of Chapter 8

Prepared by Willy - 0321902001

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