Dalhousie University A Crisis for Walmarts Disabled Workers Article Analysis need list of possible solution part and justification of solutions for a case

Dalhousie University A Crisis for Walmarts Disabled Workers Article Analysis need list of possible solution part and justification of solutions for a case and approximately 500 words, and I will post all materials for the case also instructions. Identify possible solutions to each problem as stated. What objectives can be achieved with each solution? and Present a recommended solution and justify this choice. You should not present every possibility; rather you should limit yourself to presenting the most convincing, cohesive solution. (The case is in file walmart case for ethics and csr) CHAPTER 18
F I N A N C I A L S TAT E M E N T S A N A LY S I S A N D
FINANCIAL MODELS
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-1
KEY CONCEPTS AND SKILLS
• Describe the components of the cash cycle and
why it is important
• Define the pros and cons of the various shortterm financing policies
• Prepare a cash budget
• Outline the various options for short-term
financing
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-2
CHAPTER OUTLINE
18.1 Tracing Cash and Net Working Capital
18.2 The Operating Cycle and the Cash
Cycle
18.3 Some Aspects of Short-Term Financial
Policy
18.4 The Cash Budget
18.5 Short-Term Borrowing
18.6 A Short-Term Financial Plan
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-3
BALANCE SHEET MODEL OF THE FIRM
Current Assets
Fixed Assets
1 Tangible
2 Intangible
Current
Liabilities
Net
Working
Capital
How much shortterm cash flow
does a company
need to pay its
bills?
Long-Term
Debt
Shareholders’
Equity
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-4
18.1 TRACING CASH AND NET
WORKING CAPITAL
• Current Assets are cash and other assets that
are expected to be converted to cash within
the year




Cash
Marketable securities
Accounts receivable
Inventory
• Current Liabilities are obligations that are
expected to require cash payment within the
year
• Accounts payable
• Accrued wages
• Taxes
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-5
DEFINING CASH IN TERMS OF
OTHER ELEMENTS
Net Working
Fixed
+
=
Capital
Assets
Net Working
Capital
= Cash +
LongTerm +
Debt
Other
Current
Assets

Equity
Current
Liabilities
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-6
DEFINING CASH IN TERMS OF
OTHER ELEMENTS CONCLUDED
LongNet Working
Fixed
Cash = Term + Equity –

Capital
Assets
(excluding cash)
Debt
• An increase in long-term debt and or equity
leads to an increase in cash—as does a
decrease in fixed assets or a decrease in the
non-cash components of net working capital.
• The sources and uses of cash follow from this
reasoning.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-7
ACTIVITIES THAT INCREASE AND
DECREASE CASH
Increase Cash
• Increase Long Term
Debt
• Sell Additional Equity
• Increase Current
Liabilities
• Sell Current Assets
• Sell Fixed Assets
Decrease Cash
• Pay off Long Term
Debt
• Repurchase Equity
• Pay off Current
Liabilities
• Buy Current Assets
• Buy Fixed Assets
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-8
18.2 THE OPERATING CYCLE AND
THE CASH CYCLE
Raw material
purchased
Finished goods sold
Cash
received
Order
Stock
Placed Arrives
Inventory period
Accounts receivable period
Time
Accounts payable period
Firm receives invoice
Cash paid for materials
Operating cycle
Cash cycle
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18-9
THE CASH CYCLE
Cash cycle = Operating cycle –
Accounts
payable
period
• In practice, the inventory period, the accounts
receivable period, and the accounts payable
period are measured by days in inventory, days
in receivables, and days in payables.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-10
EXAMPLE: OPERATING AND CASH
CYCLE
• Inventory:
• Beginning = 200,000
• Ending = 300,000
• Accounts Receivable:
• Beginning = 160,000
• Ending = 200,000
• Accounts Payable:
• Beginning = 75,000
• Ending = 100,000
• Net sales = 1,150,000
• Cost of Goods sold = 820,000
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-11
EXAMPLE: OPERATING CYCLE
CALCULATIONS
• Inventory period
• Average inventory = (200,000+300,000)/2 =
250,000
• Inventory turnover = 820,000 / 250,000 = 3.28
times
• Inventory period = 365 / 3.28 = 111 days
• Receivables period
• Average receivables = (160,000+200,000)/2 =
180,000
• Receivables turnover = 1,150,000 / 180,000 =
6.39 times
• Receivables period = 365 / 6.39 = 57 days
• Operating cycle = 111 + 57 = 168 days
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-12
EXAMPLE: CASH CYCLE
CALCULATIONS
• Payables Period
• Average payables = (75,000+100,000)/2 = 87,500
• Payables turnover = 820,000 / 87,500 = 9.37
times
• Payables period = 365 / 9.37 = 39 days
• Cash Cycle = 168 – 39 = 129 days
• We have to finance our inventory for 129
days.
• If we want to reduce our financing needs, we
need to look carefully at our receivables and
inventory periods – they both seem
excessive.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-13
INTERPRETATION OF THE CASH CYCLE
• Cash cycle increases when:
• Inventory and receivable periods get longer
• Cash cycle decreases when:
• Payables periods are extended and receivables periods
shortened
• There is a direct connection between a company’s
cash cycle and profitability
• Total asset turnover is a useful measure
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-14
18.3 SOME ASPECTS OF SHORTTERM FINANCIAL POLICY
• There are two elements of the policy that
a firm adopts for short-term finance
• The size of the firm’s investment in current
assets, usually measured relative to the
firm’s level of total operating revenues
• Flexible
• Restrictive
• Alternative financing policies for current
assets, usually measured as the
proportion of short-term debt to long-term
debt.
• Flexible
• Restrictive
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-15
SIZE OF INVESTMENT IN
CURRENT ASSETS
• A flexible short-term finance policy would
maintain a high ratio of current assets to sales
• Keeping large cash balances and investments in
marketable securities
• Large investments in inventory
• Liberal credit terms
• A restrictive short-term finance policy would
maintain a low ratio of current assets to sales.
• Keeping low cash balances, no investment in marketable
securities
• Making small investments in inventory
• Allowing no credit sales (thus no accounts receivable)
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-16
CARRYING COSTS AND SHORTAGE
COSTS
• Insert Figure 18.2 here (top image
only)
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APPROPRIATE FLEXIBLE POLICY
• Insert Figure 18.2 A here
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-18
APPROPRIATE RESTRICTIVE POLICY
• Insert Figure 18.2 B
here
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-19
ALTERNATIVE FINANCING
POLICIES
• A flexible short-term finance policy means a
low proportion of short-term debt relative to
long-term financing
• A restrictive short-term finance policy means
a high proportion of short-term debt relative
to long-term financing
• Compromise policy meets restrictive and
flexible policies in the middle
• In an ideal world, short-term assets are
always financed with short-term debt, and
long-term assets are always financed with
long-term debt
• In this world, net working capital is zero
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-20
18.4 THE CASH BUDGET
• A cash budget is a primary tool of shortrun financial planning
• The idea is simple: Record the estimates
of cash receipts and disbursements
• Cash Receipts
• Arise from sales, but we need to estimate
when we actually collect
• Cash Outflow




Payments of Accounts Payable
Wages, Taxes, and other Expenses
Capital Expenditures
Long-Term Financial Planning
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-21
EXAMPLE: PET TREATS INC.
• Pet Treats Inc. specializes in gourmet pet treats and
receives all income from sales
• Sales estimates (in millions)
• Q1 = 500; Q2 = 600; Q3 = 650; Q4 = 800; Q1 next year =
550
• Accounts receivable
• Beginning receivables = $250
• Average collection period = 30 days
• Accounts payable
• Purchases = 50% of next quarter’s sales
• Beginning payables = 125
• Accounts payable period is 45 days
• Other expenses
• Wages, taxes and other expense are 30% of sales
• Interest and dividend payments are $50
• A major capital expenditure of $200 is expected in the second
quarter
• The initial cash balance is $80 and the company maintains
a minimum balance of $50
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-22
PET TREATS INC.: CASH INFLOWS
• ACP = 30 days, this implies that 2/3 of sales are
collected in the quarter made, and the remaining
1/3 are collected the following quarter.
• Beginning receivables of $250 will be collected in
the first quarter.
Beginning Receivables
Sales
Cash Collections
Ending Receivables
Q1
250
500
583
167
Q2
167
600
567
200
Q3
200
650
633
217
Q4
217
800
750
267
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-23
PET TREATS INC.: CASH
OUTFLOWS


Payables period is 45 days, so half of the purchases will be paid
for each quarter, and the remaining will be paid the following
quarter.
Beginning payables = $125
Payment of accounts
Wages, taxes and other expenses
Capital expenditures
Interest and dividend payments
Total cash disbursements
Q1
275
150
50
475
Q2
313
180
200
50
743
Q3
362
195
Q4
338
240
50
607
50
628
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-24
PET TREATS INC.: CASH BUDGET
Q1
Q2
Q3
Q4
Total cash collections
583
567
633
750
Total cash disbursements
475
743
607
628
Net cash inflow
108 -176
26
122
Beginning Cash Balance
80
188
12
38
Ending cash balance
188
12
38
160
Minimum cash balance
-50
-50
-50
-50
Cumulative surplus (deficit)
138
-38
-12
110
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-25
18.5 SHORT-TERM BORROWING
• The most common way to finance a
temporary cash deficit is to arrange a shortterm loan
• Unsecured Loans
• Line of credit (at the bank)
• Compensating balances
• Secured Loans
• Accounts receivable can be either assigned or
factored
• Inventory loans use inventory as collateral
• Commercial Paper
• Trade Credit
• Cash Discounts
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-26
UNSECURED LOANS AND
COMPENSATING BALANCES
• The requirement of a compensating balance
effectively increases the cost of borrowing. We
can calculate the effective annual rate (EAR) as
follows:
• EAR = [I/LP] * [365/N]
• where I = $ amount of interest
• LP = loan proceeds available to the borrower
• N = # of days for which funds are borrowed
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-27
EXAMPLE: UNSECURED LOANS AND
COMPENSATING BALANCES
• Assume $10,000 loan for 1 year at 12 percent
annually with a 10 percent compensating balance
requirement.
• EAR=
• [10,000 * 0.12]
• 10,000 – 10,000(0.10)
*
365
365
• =13.33%
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-28
TRADE CREDIT AND CASH DISCOUNTS
• Example: 1.4/10 net 60
• A firm that buys on credit is in effect borrowing
from its supplier
• We can calculate the implicit cost of this
loan or effective annual rate (EAR) as
follows:
Effective annual rate
(
= 1 +
29
)
discount
discounted price
365 / extra days credit
– 1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-29
TRADE CREDIT: EAR CALCULATION
• Based on example: 1.4/10 net 60, we can
calculate EAR as follows:
EAR = (1 +
30
)
0.014 365/50
0.986
– 1 = 10.84%
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-30
QUICK QUIZ
• How do you compute the operating cycle and the
cash cycle?
• What are the differences between a flexible
short-term financing policy and a restrictive one?
What are the pros and cons of each?
• What are the key components of a cash budget?
• What are the major forms of short-term
borrowing?
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18-31

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