Accounting

Inventory Days or Days Inventory Outstanding or Days Sales Inventory

# days in period (usually 365) Divided by Inventory turnover ratio Or Avg inventory divided by COGS times 365 or the given days in period Inventory days is a function of COGS.

What's Days Receivables Outstanding (DRO)?

365 or the # of days in the period divided by AR Turnover It tells you how many days the Receivables balance remains outstanding or how long it takes the Company to collect cash from customers who paid on credit.

Inventory Turnover Ratio

COGS/Average Inventory Meaning: How many times does a company turn its entire Inventory balance into finished products and sell them each year?

What's the Current Ratio?

Current Assets / Current Liabilities Meaning: Can a company pay off its Current Liabilities using its Current Assets? The meaning is VERY different depending on what's in these categories.

Cash Flow from Financing (CFF)

Items related to debt, dividends, and issuing or repurchasing shares show up here.

Calculate Days Payable Outstanding

Number of days in period (365) divided by Payable Turnover Or 365 or number of days in period divided by COGS times average accounts payable

Understanding and analyzing Inventory Days

Since inventory carrying costs take significant investment, a business must try to reduce the level of inventory. Lower level of inventory will result in lower days' inventory on hand ratio. Therefore lower values of this ratio are generally favorable and higher values are unfavorable. However, inventory must be kept at safe level so that no sales are lost due to stock-outs. Thus low value of days of inventory ratio of a company which finds it difficult to satisfy demand is not favorable. Days' sales in inventory varies significantly between different industries. For example, business which sell perishable goods such as fruits and vegetables have very low values of days' sales in inventory whereas companies selling non-perishable goods such as cars have high values of days of inventory.

What is Days Payable Outstanding (DPO)?

The average number of days it takes a company to pay its suppliers. DPO is a function of COGS or OPEX. How many days the Accounts Payable balance remains outstanding on average.

What are the principles for linking the three statements?

#1: Each item on the Balance Sheet must have a corresponding line item on the Cash Flow Statement, and vice versa. - The change in each item on the Balance Sheet must be reflected once and only once on the Cash Flow Statement. #2: The CFO section of the Cash Flow Statement is derived from the Income Statement and operational items on the Balance Sheet - So, you don't "project" items like the Change in Accounts Receivable directly on the Cash Flow Statement. Instead, these items are based on how the company's Balance Sheet has changed over time. #3: The CFI and CFF sections are projected directly on the CFS and then flow into the Balance Sheet. #4: When linking in items from the Cash Flow Statement to the Balance Sheet, SUBTRACT when you're on the Assets side and ADD when you're on the Liabilities & Equity side. Example: • PP&E - Subtract both Depreciation and CapEx when you link them from the CFS to the PP&E on the Balance Sheet. • Debt - Add both debt issuances and repayments when you link them to Debt on the BS from CFS. • Investments - Subtract Gains and Losses, purchases, and proceeds from sales from the CFS to the BS.

Steps for Properly Linking the Three Statements

1) Project the entire Income Statement first and link in Net Income at the top of the CFS. Link Net Income from the Income Statement in as the top line of the Cash Flow Statement. 2) Adjust for Non-Cash Items on the Income Statement. For example, you'd make positive adjustments for Depreciation & Amortization, Stock-Based Compensation, Impairments, and Write-Downs because they're all non-cash expenses. Items like Gains and Losses and Deferred Taxes might have either positive or negative signs. 3) Project the items in CFI and CFF separately. You have to forecast the company's CapEx and investing activities, and what it plans to do with equity and debt issuances, share repurchases, and so on. FX Rate Effects, if they exist, also fall into the "separate and independent" category. 4) Sum up all the sections to calculate the Net Change in Cash. Add up CFO, CFI, CFF, and FX Rate Effects to calculate the Net Change in Cash at the bottom. 5) Link Net Income and the Net Change in Cash to the Balance Sheet. Ending cash at the bottom of the Cash Flow Statement flows into Cash on the Balance Sheet, and Net Income at the top of the CFS flows into Retained Earnings. 6) Link each Non-Cash Adjustment to the appropriate line item. For example, link Depreciation to PP&E and the Amortization of Intangibles to Other Intangible Assets. On the ASSETS side, you subtract links, and on the LIABILITIES & EQUITY side, you add links. 7) Link each CFI and CFF item to the appropriate line item on the Balance Sheet. You link many CFI items to Long-Term Assets, and you link many CFF items to Long-Term Liabilities and Equity. For example, you link CapEx under CFI to PP&E and you link Share Repurchases under CFF to Treasury Stock. On the ASSETS side, you subtract links, and on the LIABILITIES & EQUITY side, you add links. 8) Check that the Balance Sheet balances. If it does not, review the line items on the BS and CFS and check that they satisfy all the principles above.

Cash Flow from Investing (CFI)

Anything related to the company's investments, acquisitions, and PP&E shows up here. Purchases are negative because they use up cash, and sales are positive because they result in more cash. Rough Proxy: Corresponds to Long-Term Assets... but that's not exactly true since investments within Current Assets can also show up here.

Understanding and analyzing the DPO ratio

In general, a low DPO highlights good working capital management because the company is availing early payment discounts. However, the DPO should be corroborated by other ratios, particularly the liquidity ratios. When a company's liquidity position is good, a high days payables outstanding most likely tells that the company is delaying payments to its creditors till the last possible date to shorten its cash conversion cycle. It highlights good working capital management. However, if the liquidity situation of the company is not good, a high DPO suggests that the company is facing problems paying its suppliers.

Calculate Receivables Turnover Ratio or A/R Turnover

Revenue / Average Accounts Receivable Meaning: How many times does a company collect the entire Receivables balance from customers each year?

What's the Asset Turnover Ratio?

Revenue divided by average total assets Meaning: How dependent is a company on its assets to generate sales? A lower ratio indicates greater dependency.

Cash Flow From Operations (CFO)

Starts with Net Income at the top, adjusts for non-cash operating balance items, and then factors in how operational Balance Sheet items change in that period. Rough Proxy: Corresponds to Current Operating Assets and Current Operating Liabilities... but that's not exactly true, since cash, investments, and debt do NOT show up here, whereas some longer-term items such as Deferred Revenue do. So, it's better to think of this section as: "Net Income, non-cash adjustments, and operational Balance Sheet items." Items like Deferred Tax Liabilities on the B/S are impacted by adjustments in the CFO section. So as deferred income taxes are adjusted on the CFO section the balance of

What is a Deferred Tax Liability (DTL)?

This represents a timing difference in taxes paid vs. taxes owed. For some reason, the company paid less in taxes than what it owed in some earlier period, and it must make up the difference by paying more to the government in the future. So a DTL represents the difference between taxes paid vs. taxes owed in a given period...

If Deferred Taxes increases by $100, which of the following changes take place on the financial statements? a) Cash Flow from Operations increases by $100. b) Net Income increases by $100. c) The Deferred Tax Liability decreases by $100. d) All of the above.

a) Cash Flow from Operations increases by $100 Deferred Taxes do NOT impact the Net Income shown on the Income Statement because they are more like a non-cash adjustment, so the second answer is false. The third answer is false because Deferred Taxes make the Deferred Tax Liability INCREASE, not decrease. The first answer choice is the only correct one because Deferred Taxes are recorded as a noncash adjustment on the CFS, and result in the company's cash flow increasing by however much was deferred to future periods.