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# Mini Case: Financial Statement and Cash Flow - Essay Example

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Mini Case: Financial Statement and Cash Flow Analysis By ID Code+ University name Date PART A: 1. Calculate Jaedan’s free cash flow. Free cash flow is useful in determining the company’s flow of cash…

## Extract of sampleMini Case: Financial Statement and Cash Flow

Download file to see previous pages... Free cash flow= cash from operations- capital expenditures The free cash flow represents the financial ability of the company; that is its ability to engage in investment activities that goes beyond the planned investment activities (Walter, Harrison, & Horngren, 2003). However, noting that many investment activities of companies are quite significant, caution should be taken when implementing any investment activity that falls above the budgeted investments. Cash from operations is also referred to as earnings before interest net of depreciation and amortization. Therefore; Free cash flow= 17,237,000+800,000 =18,037,000 2. Calculate Jaedan’s liquidity. A company’s liquidity ratios are used in determining the organizations capacity to meet its short-term obligations when they fall due. Liquidity ratios are important to the investors when conducting fundamental analysis of the firm. High values imply that a firm has adequate assets compared to liabilities and should therefore can pay off short-term debts with ease. Current ratio helps to assess the company’s current assets ability to pay-off current liabilities. The liquidity ratios include: Current ratio= Current Assets/ Current liabilities =15,066,000/4,342,000 =3.5 Industry current ratio= 3.26 Quick ratio also is also known as acid test ratio. It is more stringent and refined than current ratio. The ratio uses assets that are highly liquid. The main asset left out in the numerator component is inventory which is quite difficult to liquidate in timely period and at market value. Quick ratio is highly conservative as it focuses on short-term investments, cash and accounts receivable. Quick Ratio= (Cash & Equivalents + Short-Term Investments + Accounts Receivable) ? Current Liabilities = (3,689,000+1,836,000+5,423,000)/4,342,000 =2.52 Industry ratio= 2.19 Cash ratio is the highly conservative among the three liquidity ratios. The ratio simply concerns assets that can be utilized to pay short-term debts thereby disregarding short-term investments and receivables. The fact behind exclusion of short-term investments and receivables is that they cannot be monetized as soon as the firm may be requiring the funds. Cash Ratio = Cash & Equivalents ? Current Liabilities = 3,689,000/4,342,000 =0.85 3. Calculate Jaedan’s debt and profitability ratios. Debt Ratio Debt ratio helps to compare company’s total debt to its total assets. It sheds light on the leverage applied by the company. A lower ratio indicates that the company is less reliant on money borrowed from others (Nobes & Parker, 2000). Therefore the lesser the percentage the stronger the company’s equity position and the higher the ratio the riskier the company is. Debt ratio= Total liabilities/Total assets = 4,342,000/ (8,851,000+15,066,000) = 4,342,000/23,917,000 = 0.18 or 18% Industry ratio= 39.36% Profitability ratios are helpful in comparing how profitable a firm is in the industry. These ratios include: Gross margin ratios Gross margin is the difference between company sales and the cost of such sales. Simply, it is the amount that a company keeps as gross profit. Gross margin is expressed in percentage terms and a higher margin indicates that the company is making more profit. Gross margin= Gross profit/ Sales =19,658,000/42,000,000 =0.47 or 47% Industry ratio= 23.74% Operating margin Operating margins indicates how much a firm makes of from its sales. It indicates company’s performance as it accounts for other important costs of operating income, besides costs of ...Download file to see next pagesRead More
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