analyzing investing activities in financial statement

Topics: Asset, Depreciation, Generally Accepted Accounting Principles Pages: 12 (4093 words) Published: June 8, 2014

1.0 Introduction

Ryan C. Fuhrmann explains that an investing activity usually refers to cash spent on investments in capital assets such as plant and equipment, which is collectively referred to as capital expenditure, or capex Its mean that investing activities refer to Assets are resources controlled by company for the purposed of generating profit. The assets can classified into two (2) types- current and noncurrent: (1) Current asset (short term) is resources or claims to resources (balance sheet item) that are expected to be sold, collected, or used within one year or the operating cycle, whichever is longer; and (2) Non current asset (long term) is resources or claims to resources that are expected to yield benefits that extend beyond one year or the operating cycle, whichever is longer.

2.0 Current Asset

A current asset is an item on an entity’s balance sheet can be converted into cash within the operating cycle of the company or within one year .Examples of current asset such as cash and cash equivalent, receivables, prepaid expenses and inventories.

2.1 Cash, Cash Equivalents and Liquidity – John J. Wild refer that cash can consist of currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts, meanwhile cash equivalent is short-term, highly liquid investments that are readily convertible to a known cash amount. When refers to cash, most important analysis is highly liquid in short- term investments through (1) readily convertible into cash, and (2) near to maturity that minimal risk of price changes due to interest rate movements or meaning that close to maturity date and not sensitive to interest rate changes, which can carry maturities of three months or less , ie, short term treasury bills, commercial paper and money market funds. The liquidity concept is important for investing analysis to shows that amount of cash and cash equivalents the company has on the hand and the amount of cash can raise in short period of time. Analysis of Cash and Cash Equivalents should be done to examining the amount of liquid assets available and to consider:

i. Companies risk a reduction in liquidity should the market value of short-term investments decline. ii. Cash and cash equivalents are sometimes required to be maintained as compensating balances to support existing borrowing arrangements or as collateral for indebtedness. For examples: e-Bay inc. which placed $126 million out of $400 million in cash and cash equivalent as collateral for the term of the lease.

2.2 Receivables -From Definition of Current Asset, Accounting Tool defined that receivables can represent the amounts to be collected from the customers who purchased the company's products on credit. Meanwhile, K. R Subramanyam defined receivables are amounts due to company from others that arise from the sale of goods or services, or the loaning of money. One type of receivables is accounts receivable which refer to oral promises of indebtedness due from customers who purchased company’s products or services. Other than that is notes receivable refer to formal written promises of indebtedness due from others Valuation of Receivables is important because of their impact on company’s asset position and income stream. So, that required in practice, receivables to reported at their net realizable value — total amount of receivables less an allowance for uncollectible accounts. Usually, management would estimates the allowance for uncollectibility based on experience, customer fortunes, economy and industry expectations, and collection policies.

Analyzing Receivables-Assessment of earnings quality is often affected by an analysis of receivables and their collectability. This analysis must be alert to changes in the allowance by computed relative to sales, receivables, or industry and market conditions. During analysis of receivables done, there are two(2) special analysis questions will occur:...

References: 1. Financial Statement Analysis: Eleventh Edition, John J. Wild / Leopold A. Bernstein/ K.R Subramanyam (McGraw Hill International), (2014)
2. Cash Flow Statement: Analyzing Cash Flow From Investing Activities,  Ryan C. Fuhrmann on November 25, 2013, Retrieved on June 1, 2014 from http://www.investopedia.com/articles/investing/112513/cash-flow-statement-analyzing-cash-flow-investing-activities.aspent
3. Definition of Current Asset, Accounting Tool, Retrieved on June 1, 2014 from http://www.accountingtools.com/definition-current-asset
4. Financial Accounting Terms
Accounts Receivable (2014) Retrieved on May 31, 2014 from http://accountingstudy.com/accounting-courses/financial-accounting-terms-dictionary/accounts-receivable.html
5. Definition of 'Prepaid Expense ' (2014)Retrieved on May 31, 2014 from http://www.investopedia.com/terms/p/prepaidexpense.asp
6. Types of Inventory Costing Methods David Ingram(2014), Demand Media Retrieved on May 31, 2014 from http://smallbusiness.chron.com/types-inventory-costing-methods-11444.html
7. Accounting for investment securities, Mcgraw-hill, Retrieved on May 31, 2014 from http://highered.mcgraw-hill.com/sites/dl/free/ 0073527122/788594/edm271urity sec22_appe_738_746.pdf
8. Definition of “Derivative Securities” ,Retrieved on May 31, 2014 from http://www.investopedia.com/terms/d/derivative.asp
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