College Of Administrative And Financial Sciences Assi 102642 ✓ Solved

College Of Administrative And Financial Sciencesassignment 1principles

Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark – 0.2 each) a) Is a decrease in land and buildings an inflow or an outflow of cash? b) Is an increase in accounts payable an inflow or an outflow of cash? c) Is a decrease in vehicles an inflow or an outflow of cash? d) Is an increase in accounts receivable an inflow or an outflow of cash? e) Is the payment of dividends an inflow or an outflow of cash?

Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed here: Island Burger Fink Roland Ratio Electric Utility Heaven Software Motors Current ratio 1.55 2.34 1.58 1.44 Quick ratio 0.73 1.17 0.67 0.89 Debt ratio 0.34 0.43 0.55 0.28 Net profit margin 6.25% 14.33% 28.46% 8.43% Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) (0.25 Marks) 1. The four companies are in very different industries. 2. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values. 3. Financial ratios from software companies are never very reliable. 4. Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company. b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? (Select all the answers that apply.) (0.25 Marks) 1. Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers. 2. The explanation for the lower current and quick ratios most likely relates to poor management performance. 3. Their accounts receivable balances are going to be much lower than for the other two companies. 4. The explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis. c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? (Select all the answers that apply.) (0.25 Marks) 1. A high level of debt can be maintained if the firm has a large, predictable, and steady cash flow. 2. The software firm will have very uncertain and changing cash flow. 3. Utilities tend to have steady cash flow requirements. 4. The software industry is subject to greater competition resulting in more volatile cash flow. d. Why wouldn’t investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.) (Select all the answers that apply.) (0.25 Marks) 1. Software companies tend to carry large debt which represents senior claims on the companies' assets. 2. Investors wouldn’t invest all of their money in software companies because their average collection period is usually very high. 3. By placing all of the money in one stock, the benefits of reduced risk associated with diversification are lost. 4. Although the software industry has potentially high profits and investment return performance, it also has a large amount of uncertainty associated with the profits. 3. You have $5,100 to invest today at 11% interest compounded annually. Find how much you will have accumulated in the account at the end of: (0.5 Marks each) (1) 4 years, (2) 8 years, and (3) 12 years. 4. Using the values below, answer the questions that follow: Amount of annuity Interest rate Deposit period (years) $10 5% 10 a) Calculate the future value of the annuity, assuming that it is (1) an ordinary annuity. (0.5 marks) (2) an annuity due. (0.5 marks) b) Compare your findings in parts a (1) and a (2). All else being equal, which type of annuity—ordinary or annuity due—is preferable as an investment? Explain why.

Sample Paper For Above instruction

Financial analysis and understanding cash flows are fundamental aspects of financial management and investment decision-making. This paper addresses key concepts such as cash flow classification, ratio analysis across different industries, investment calculations, and the evaluation of different types of annuities, drawing insights from theoretical principles and practical examples.

Cash Flow Classification

Determining whether specific account changes represent inflows or outflows of cash is essential for preparing financial statements and assessing liquidity. A decrease in land and buildings typically signifies an outflow of cash, often due to asset sales or depreciation adjustments. Conversely, an increase in accounts payable, a liability, generally indicates an inflow of cash as the company delays payments or extends credit. A decrease in vehicles suggests an outflow if it results from asset sales. An increase in accounts receivable, an asset, usually means a cash outflow because it reflects revenue earned but not yet collected. Paying dividends entails an outflow as cash is distributed to shareholders.

Ratio Analysis and Industry Comparisons

Robert Arias's diversification across industries introduces complexities in comparative analysis. Ratios such as current and quick ratios vary significantly depending on industry operating characteristics. For example, utilities and fast-food restaurants usually have lower current and quick ratios because their operations are cash-intensive, with minimal inventories or receivables, unlike software firms that may hold substantial receivables or inventory investments. Comparing ratios across different industries without context can lead to misleading conclusions, as much of the disparity stems from sector-specific operational norms rather than financial performance.

Additionally, comparing companies at different stages of growth or lifecycle can distort ratio analysis. Older, established firms tend to have more stable financial profiles compared to newer or emerging industries like software, which are often riskier and more volatile. Therefore, contextual industry knowledge is essential for accurate interpretation of financial ratios.

Cash Flow and Debt Management

The ability of a company to sustain a high debt ratio depends on the stability and predictability of its cash flows. Utilities, which provide essential services, often maintain higher debt levels because of their consistent revenue streams. This contrasts with software companies, which face volatile cash flows due to market competition and rapid technological changes, making high debt levels riskier for them.

Investors often diversify their portfolios to mitigate risk. Investing solely in high-growth but high-risk sectors like software can lead to significant volatility and potential losses. Diversification across industries reduces unsystematic risk and stabilizes returns, which explains why investors rarely put all their capital into a single sector.

Investment Calculations

Using compound interest formulas, the future value (FV) of an investment of $5,100 at 11% annually over different periods was calculated. For 4 years, FV ≈ $8,680; for 8 years, FV ≈ $14,864; and for 12 years, FV ≈ $25,373. These calculations exemplify how the time horizon influences investment growth due to compound interest.

In analyzing annuities, future value calculations differ based on whether payments are considered as ordinary annuities or annuities due. For an annuity with a $10 deposit at 5% over 10 years, the FV of an ordinary annuity is less than that of an annuity due, which benefits from payments occurring at the beginning of each period, leading to higher accumulated value. While both types are viable investment options, an annuity due often provides greater returns due to the earlier timing of payments, emphasizing the importance of payment timing in investment planning.

Conclusion

Understanding financial ratios in the context of industry norms, accurately classifying cash flows, and calculating the future value of investments and annuities are vital skills for financial analysts and investors. Proper application of these principles aids in making informed financial decisions that align with risk tolerances and investment objectives.

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