Activity 5-1 Working Capital Management PDF

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Activity 5-1: Working Capital Management

James Gruening Southern New Hampshire University FIN-320 Professor Barnack June 01, 2021

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Financial Statements Financial Statements are the vitals of a company’s overall health. They give us record of how a company is performing. Financial statements are prepared in accordance with a set of accounting principles that separates reported statement figures, present values, and cash flows, but we can determine the cash flow implications for the firm from its reported financial statements. The four basic financial statements are income statements, balance sheets, cash flow statements, and statements of shareholders equity (Pearson 2018). Working capital is the difference in assets and liabilities. We begin with the income statement, sometimes referred as p&l or proffit and loss statement, measures the amount of profits generated by a firm over a given time period (usually a year or quarter). As an equation is is: Revenues ( ¿ Sales )−Expens e s=Profit Tesla reported a revenue of $26,184,000. The next step would be to subtract expenses, such as r&d, administrative expenses, interest expenses, income loss, etc. The difference would be the profit. Profit can also be defined as the difference between the firm’s revenues and expenses. The balance sheet is a snapshot of the firm’s financial position on a specific date (Pearson 2018). This differs from the income statement, which reports the cumulative results from operating expenses over a year. The balance sheet lets us calculate our total assets with the equation:

Total A ssets=T otal Liabilities+ T otal S hareholde r ' s E quity . In Tesla’s case, we would add cash, accounts receivable, raw materials, other assets, etc. with the total shareholder’s equity (which is a deficit) to calculate the total assets. Next is the cash flow statement, which is defined as a report that firms use to explain changes in their cash balances over a specific period of time (quarter

3 or year) by identifying all of the sources and uses of cash for that period. Cash flows are a better way to understand the true worth and valuation of a company and are an effective tool to understand where money comes from and where it goes. They are also the most coveted of the financial statements. Cash flow equation:

Change∈Cash Balance=Ending Cash Balance−BeginningCash Balance The final financial statement is the shareholder equity statement. This is the sum of the par value of common stock plus paid-in capital plus retained earnings.

Stockholde r' s Equity=Total Assets −Total Liabilities If the firm’s assets included stock or bonds that had declined in value, then the value of the company’s assets would decline accordingly. Working Capital’s Role Working capital is the difference in a firm’s liabilities and assets and a measure of the firm’s liquidity. It tells the company what they have to work with at a given time. Proper working-capital management encompasses the day-to-day activities of managing the firm’s current assets and current liabilities. Because cash, accounts receivable, inventory, and accounts payable change on a daily or hourly basis, financial managers may spend more time on working-capital management than on any other part of their job. Financial managers need to properly manage the working capital to effectively learn and manage the assets and liabilities. Working capital also has a relationship with understanding the liquidity of a firm. If a firm keeps assets above liabilities, then it has working capital. If liabilities are higher than assets then the firm does not have working capital.

Working Capital Interpretation To effectively calculate Tesla’s working capital (or liquidity), we subtract current liabilities from assets (on the balance sheet). The sum of Tesla’s assets was $52,148,000. The

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sum of Tesla’s liabilities was $28,418,000. The difference is $23,730,000, which is the working capital. The practitioner definition is accounts receivable plus inventory minus accounts payable. The three options for working capital management are to lower working capital to maximize cash flow, higher raise working capital to maximize profitability, or outsource working capital. The current ratio (assets / liabilities) is equal to 1.84. Tesla is more liquid at the end of 2020 than in any year prior, with a liquidity of 1.49, which is up 0.78 from the end of 2019. Tesla also had a positive cash flow of over $19.9 million at the year end. The company’s gross profit was $6.63 billion, which is an increase of over $2.5 billion from 2019. There will be potential cash inflow at the end of the year. Using the financial statements as a reference resource we can determine the direction the business is going. Net income was a loss in 2019 and a profit of $862,000 in 2020. The current ratio is 1.875, which indicates a strong positive working capital (over $12.4 million). The debt ratio is 0.55, which indicates more assets than liabilities. The company also has strong financial leverage. There was a significant shift in the return on investment (from 0.37 to 7.37). Common stock and stock equity both increased significantly from 2019. Liabilities however increased from $27 million to $28.4 million. Overall Tesla is moving in a direction where it’s gaining equity, cash, share value, return on investment, and profitability. These numbers reflect year end 2019 to year end 2020.

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References Financial Management: Principles and Applications Sheridan Titman, Arthur J. Keown, and John D. Martin Pearson Custom Thirteenth Edition 2018 ISBN: 978-0-13-684225-5

Mergent. (n.d.). Tesla [Company profile]. Retrieved June 1, 2020, from https://wwwmergentonline-com.ezproxy.snhu.edu/companyfinancials.php? pagetype=asreported&compnumber=129614&period=Annuals&dataarea=BS&range=5& currency=AsRep&scale=AsRep&Submit=Refresh&csrf_token_mol=8768a0fa0d...