Premium Essay

Fixed Asset and Inventory

In: Business and Management

Submitted By soocarolina53
Words 583
Pages 3
Finding Great Companied to Invest In

Warren Buffet, Chairman of Berkshire Hathaway says, “It is best to invest in great companies at a fair price than a fair company at a great price.” That’s a pinnacle statement about Buffet’s investment style. So, to invest like Buffet, you need to know what features denote a great company.
Please read and reread the following carefully.
A great company has a competitive advantage. It has a consumer monopoly, and like a great fortress, has a moat preventing others from capitalizing on it. A competitive advantage is created by producing a unique product or service over a long period of time and being perceived as the leader in the field. Buffett refers to this as a “durable competitive advantage.”
Many of these great companies have been around for a hundred or more years. Coca Cola, one of his favorites, exemplifies this concept, as do several others. American Express and Wells Fargo have also been around for a century. (Interesting, the latter two were founded by the same people.)
So, on the flip side, let’s look at the stocks Buffett avoids. He really hates companies that are involved in something that is price sensitive. Automobile manufactures are a prime example. Most people don’t care if they have a Ford, GM, or Chrysler. They want a great deal, instead.
Because these companies must constantly fight to get a customer, they must constantly upgrade and improve their product by investing lots of money in new automobiles and their development. They are “commodities”, not bastions.
Let’s look at an example taken from Mary buffets book, The New Buffettology. Company A makes improvements in its manufacturing process that lowers its cost of production while increasing its profit margins. Companies B, C, and D lower their prices to compete with company A. And so company A must again adjust. It’s a vicious cycle.
There is a...

Similar Documents

Premium Essay

Accounting

...| Operating Expenses: | | | Rent | | $438,500.00 | Insurance | | $173,000.00 | Depreciation Expense | | $146,625.00 | Interest Expense | | $460,000.00 | Salaries Expense | | $989,400.00 | Operating Expenses: | | $2,207,525.00 | Gains or Losses | | $190,000 | Income before taxes | | $657,625.00 | Income taxes | | $157,830.00 | Net income |   | $499,795.00 | 2. Statement for Cash Flows for Allgomotive Inc. | | For the period ending October 31st, 2015 | | | | | Cash Flow from Operations | | $499,795.00 | Add back: Depreciation | | $146,625.00 | Add back: Losses | | $190,000.00 | Subtract changes in Accounts Receivable | ($280,000.00) | Subtract changes in Inventory | | ($2,828,500.00) | Subtract changes in Prepaid Rent | | ($11,500.00) | Subtract changes in Prepaid Insurance | $23,000.00 | Add changes in Accounts Payable | | $149,500.00 | Add changes in Salaries Payable | | $92,000.00 | Add changes in Taxes Payable | | $58,470.00 | Add changes in short term Loan Payable | $1,340,000.00 | | | | Net Cash Provided from Operations | | ($620,610.00) | | | | Cash Flow From Investing | | | Capital Expenditure on PPE | | ($705,000.00) | Sale of PPE | | $10,000.00 | Capital Expenditure on Patent | | ($250,000.00) | | | | Net Cash Used for Investing | | ($945,000.00) | | | | Cash Flow From Financing | | | Increased Loan | |......

Words: 1661 - Pages: 7

Premium Essay

New Worlds Chemicals Inc

...2008 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2008 profit margin and dividend payout will be maintained. Under those conditions what would the AFN equation predict the company’s financial requirements to be for the coming year? Solution Additional Funds Needed (AFN) are also known as External Funding Required. In the following, the AFN equation is displayed for 2009: AFN=(A^*/S_0 )∆S-(L^*/S_0 )∆S-M(S_1)(RR) AFN=($1000/$2000)$500-($100/$2000)$500-0.0252($2500)(($50.4-$15.12)/$50.04) AFN=0.5*$500-0.05*$500-0.0252($2500)(0.7) AFN=$250-$25-$44.1=$180.9 Answer: NWC will need $180.9 million. Section B Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information. (1) NWC’s high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a result, NWC’s accounts receivable manager expects the firm to lower receivables enough to make the DSO equal to 34 days without adversely affecting sales. (2) NWC was operating a little below capacity, but its forecasted growth will require a new facility, which is expected to increase NWC’s net fixed assets to $700 million. (3) A relatively new inventory management......

Words: 1658 - Pages: 7

Premium Essay

Client Understanding

...asking for information on the following topics: adjusting lower cost of market inventory on valuation; capitalizing interest on building construction; recording gain or loss on asset disposal; and adjust goodwill for impairment. This paper will strive to answer these questions for the client. Adjusting Lower Cost of Market Inventory on Valuation One of the requirements of the Generally Accepted Accounting Principles (GAAP) is that inventory be recorded at lower of cost or market rule, also known as LCM. In a company’s’ financial statements, assets are generally stated in the financial statements according to the cost principle. However, when it comes to inventory, cost principle is abandoned and lower of cost or market rule takes its place. The LCM states that inventory should be measured at the lower of cost or market value (Accounting Explained). What market value means basically is the replacement cost of the company’s inventory. This replacement cost can be in the form of a purchase cost or a manufacturing cost; simply stated, market value is the amount a company would have to pay to acquire their inventory of the same quantity and quality through purchase or through manufacturing. There are upper limits (ceiling) as well as lower limits (floor) on the market value of inventory. These are fairly simple to figure. The upper limit is the net realizable value (NRV) of a company’s inventory. The NRV equals the expected selling price minus the sum of the expected......

Words: 1328 - Pages: 6

Premium Essay

Accounting, Chapther 17, Practice Excersices

...PRACTICE EXERCISES PE 17–1A Accounts payable $8,400 increase ($78,400 – $70,000), or 12% Long-term debt $5,760 increase ($101,760 – $96,000), or 6% PE 17–1B Temporary investments $10,800 increase ($70,800 – $60,000), or 18% Inventory $11,000 decrease ($99,000 – $110,000), or –10% PE 17–2A Amount Percentage Sales $500,000 100% ($500,000 ÷ $500,000) Gross profit 140,000 28 ($140,000 ÷ $500,000) Net income 40,000 8 ($40,000 ÷ $500,000) PE 17–2B Amount Percentage Sales $600,000 100% ($600,000 ÷ $600,000) Cost of goods sold 480,000 80 ($480,000 ÷ $600,000) Gross profit $120,000 20% ($120,000 ÷ $600,000) PE 17–3A a. Current Ratio = Current Assets ÷ Current Liabilities Current Ratio = ($190,000 + $150,000 + $260,000 + $300,000) ÷ $600,000 Current Ratio = 1.5 b. Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($190,000 + $150,000 + $260,000) ÷ $600,000 Quick Ratio = 1.0 PE 17–3B a. Current Ratio = Current Assets ÷ Current Liabilities Current Ratio = ($140,000 + $60,000 + $40,000 + $80,000) ÷ $160,000 Current Ratio = 2.0 b. Quick Ratio = Quick Assets ÷ Current Liabilities Quick Ratio = ($140,000 + $60,000 + $40,000) ÷ $160,000 Quick Ratio = 1.5 PE 17–4A a. Accounts Receivable Turnover = Net Sales ÷ Average Accounts Receivable Accounts Receivable Turnover = $560,000 ÷ $40,000 Accounts Receivable Turnover = 14.0 b. Number of Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily......

Words: 1088 - Pages: 5

Premium Essay

Tim Time Tome

...Solved! 1. Transactions. NLF Shares are issued for cash. Goods for inventory are sold for cash. Goods from inventory are sold on account. A fixed asset is sold for cash for less than book value. A fixed asset is sold for cash for more than book value. Corporate income tax is paid. Payment is made to trade creditors. Cash is obtained through a short-term bank loan. Cash is obtained through a long-term bank loan. A cash dividend is declared and paid. Accounts receivable are collected. Merchandise is purchased on account. Cash advances are made to employees. Minority interest in a firm is acquired for cash. Equipment is acquired for cash. + + + + + 0 0 0 + – 0 0 0 – – WCR 0 – + 0 0 + + 0 0 0 – 0 + 0 0 NSF – – 0 – + + 0 – + – 0 + + + NET PROFIT 0 + + – + 0 0 0 0 0 0 0 0 0 0 3. Reconstructing a balance sheet. Sales 20 days of sales 360 days of sales Accounts receivable 40 days of sales Inventory Inventory = $400,000 = ($400,000/20) × 360 = $7,200,000 = ($7,200,000/360) × 40 = $800,000 = Sales/6 = $7,200,000/6 = $1,200,000 Working capital requirement (WCR): WCR = .20 × Sales = .20 × $7,200,000 = $1,440,000 Accounts payable Since WCR Accounts payable = (Accounts receivable + Inventory) – Accounts payable, = (Accounts receivable + Inventory) – WCR = ($800,000 + $1,200,000) – $1,440,000 = $560,000 Net fixed assets Net fixed assets Net fixed assets = Total assets – Current assets = Total assets – Inventory – Accounts receivable – Cash = $5,000,000 – $1,200,000 –......

Words: 836 - Pages: 4

Premium Essay

Hbr Solution Unidentified Industries

...The Case of the Unidentified Industries - 1995 Solution: In order to find out the exact firm by analysing the financial structure of typical firms, first we need to separate those firms which have zero inventory turnover (A, B, F and H) from those firms which have zero debt ratio which in our case are (E, H and J) and we use the information to narrow down the possibilities of each firm. In this case there are three groups of companies: 1) Firms having zero inventory turnover. 2) Firms having zero debt. 3) Firms having all financial ratios given. 1) Firms having zero inventory turnover: Under the category of zero inventories, there are four companies. The nature of these companies show that they are not involved in any production, but they provide services to the people and from services they generate cash. Each one with the name and reason is mentioned below. Firm A. Commercial Bank: The financial structure of (A) firm shows that it has zero inventory turnover and high receivables collection period. Banks usually have a large amount of receivables because they lend money to the individual people and a company due to which the average number of days, which in this case is very high, requires to convert receivables into cash is very high. Its financial structure also shows that the firm has borrow money from outside to pay debt to its customers. Firm B. Advertising Agency: This firm has very high receivables and payables due to one reason or the...

Words: 1143 - Pages: 5

Premium Essay

Puni

...599 % -12.58 % 3.284 % -4.653 % Return on assets 5.00 % 0.562 % -8.486 % 2.531 % -4.25 % Return on equity 0.0753 % 0.00796 % -0.113 % 0.0341% -0.059% Receivable turnover 6.046 times 6.268 times 3.932 times 5.115 times 6.00 times Avg collection period 60 days 57 days 92 days 70 days 60 days Inventory turnover 8.8 times 5.6 times 3.7 times 5.1 times 4.7 times Fixed asset turnover 2.23 times 2.0 times 1.24 times 1.5 times 1.773 times Total assets turnover 0.96 times 0.94 times 0.68 times 0.77 times 0.91times Current ratio 1.69 times 1.89 times 1.844 times 2.347 times 1.81 times Quick ratio 1.84 times 1.3 times 1.23 times 1.43 times 1.07 times Debt to total assets 33.64 % 29.38 % 24.7 % 25.67 % 28.14 % Times interest earned 16.72 % 0.753 % 16.53 % 7.88 % -23.57 % Financial Position Ratio's 2005 2006 2007 2008 2009 Profit margin 5.215 % 0.599 % -12.58 % 3.284 % -4.653 % Return on assets 5.00 % 0.562 % -8.486 % 2.531 % -4.25 % Return on equity 0.0753 % 0.00796 % -0.113 % 0.0341% -0.059% A. Profitability ratio Profitability ratios are the financial statement ratios which focus on how well a business is performing in terms of profit. These three profit margin ratios state how much profit the company makes for every dollar of sales. 1) Profit Margin Ratio's 2005 2006 2007 2008 2009 Profit margin 5.215 % 0.599 % -12.58 % 3.284 % -4.653 % • A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, is generated from......

Words: 1607 - Pages: 7

Premium Essay

Case 6

...R&D, so it has come to be seen as the partner of choice for licensing deals with other pharmaceutical and biotechnology firms. Because of its undiversified products and high invest on R&D, this firm should have less fixed assets and higher intangibles. On the other hand, the second company has diversified health-products including pharmaceuticals, consumer health and beauty products, and medical devices, so it should have higher receivables, accounts payable, and cost of goods sold. Moreover, because of its mass-market-oriented strategy, it needs to spend much money on advertising, which makes it has similar SG&A expense with first firm who is the world’s largest prescription-pharmaceutical company. Our conclusion is the first firm is B and the second firm is A (firms’ financial data see table 1). Industry 2: Beer The first company is a national brewer of mass-market consumer beers sold under a variety of brand names, so it must have more intangible assets than the second firm, who produces seasonal beers with smaller production volume. Moreover, the first firm is not only a brewer firm, but also involves in beer-related business, such as snack and aluminum-container manufacturing, and they even have several major theme parks, so it must have higher fixed assets. The second company looks...

Words: 1200 - Pages: 5

Premium Essay

Valuation of Fixed Assets

...Comment on valuation of Fixed Assets, Depreciation and Inventories of Asian Paints and Berger Paints: To comment on these we require the internal and external audit reports and the system and procedures adopted by the company to maintain its records. As per the Annual report given, both the companies are reasonably following all the accounting practices, physical verification and no qualifying remarks by the Auditors on these three items. Fixed Assets: Asian Paints: The Company is increasing Fixed Assets base on year on year basis. Net FA is increased from 707 crores to 2012 crores in five year term. The company wants to increase the capacity further in their Haryana Plant. So FA is likely to increase in a phased manner. Replacement of old assets with energy efficient equipment will further increase FA base. There is no revaluation of fixed assets during the period under review. Fixed assets of which values are below Rs.5000 are charged to revenue as per income tax guidelines. Research and Development assets can be debited to revenue according to Income tax provisions where as the company has chosen to capitalize and provide depreciation according to company law. Impairment assets provision in Profit and Loss account to the tune of about 15.30 crores is again a matter for dispute. Otherwise Fixed assets are valued as per norms, cost plus taxes and other erection charges and the other permissible expenses. Berger Paints: The company is also in......

Words: 678 - Pages: 3

Premium Essay

Client Understanding Paper

...cleat understanding is a goal of ABC Company. The firms provide detailed explanations to address each customer’s need. ABC Company recognizes that your company has questions related to adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting goodwill for impairment. Inventories of companies are recorded at cost, except when the inventory declines in value below its original cost. When the cost declines below the original cost the company should write down the inventory to report this loss. “A company abandons the historical cost principle when the future utility of the asset drops below its original cost. Companies therefor report inventories at the lower-of-cost-or-market (LCM) at each reporting period” (Kieso, E., & Weygandt, 2010, p. 438). LCM uses a conservative approach to inventory valuation, meaning that when doubt exists about the value of an asset the company should use the lower value of an asset, which will reduce net income. This provides the company with a more conservative balance sheet and income statement valuations. To determine LCM, one must also consider net realizable value (NRV). This value represents the selling price of inventories minus the fees associated with completion of sales. Conclusion of market value also refers to an items current replacement cost. This cost falls between the NRV (ceiling value) and the floor value (NRV- normal......

Words: 1245 - Pages: 5

Free Essay

Case Analysis- Inventory or Property Plant and Equipment

...Case Analysis- Inventory or Property Plant and Equipment Overview and Introduction Red Hen Company, which operates for producing and processing and selling fresh eggs. After its first year, it began to prepare financial statements. However, the accountancy found it’s hard to identify these egg-producing flocks as inventory or as property, plant and equipment. This essay will cite accounting standards and rules from FASB, identifying the definitions related to inventory and fixed asset, and discuss the related details in company’s specific situation. Finally, the essay will provide recommendations on how to present the hens in the financial statement, and draw a conclusion based on the previous recommendations. Identification Based on Accounting Principles and Specific Situation When preparing financial statements at the end of its first operating years, Red Hen Company has to identify the classification of its egg-laying flocks. Whether the items should appear in the inventory section under the current asset, or be treated as fixed asset? Admittedly, the egg-laying flocks can be identified as fixed asset (Property, plant, and equipment), which used to create and distribute an entity’s products and services [FASB ASC 360-10-05]. Specifically, egg-laying flocks could be treated as equipment. [FASB ASC 905-360-25-4] points out “except for animals with short productive lives classified as inventory, breeding animals, livestock (which includes cattle, hogs, sheep, and......

Words: 862 - Pages: 4

Premium Essay

Ratio Analysis

...performance.    Balance Sheet as of December 31, 2010 | Gary and Company | Cash   | $45 |   | Accounts payables   | $45 | Receivables     | 66 |   | Notes payables  | 45 | Inventory | 159 |   | Other current liabilities  | 21 | Marketable securities | 33 |   | Total current liabilities | $111 | Total current assets  | $303 |   |   |   | Net fixed assets   | 147 |   | Long Term Liabilities |   | Total Assets   | $450 |   | Long-term debt   | 24 |   |   | Total Liabilities  | $135 |   |   |   |   |   |   | Owners Equity |   |   |   | Common stock | $114 |   |   | Retained earnings | 201 |   |   | Total stockholders’ equity | 315 |   |   |   | Total liabilities and equity | $450 |       Income Statement Year 2010 |   |   | Net sales | $795 | Cost of goods sold  | 660 | Gross profit   | 135 | Selling expenses   | 73.5 | Depreciation | 12 | EBIT | 49.5 | Interest expense   | 4.5 | EBT | 45 | Taxes (40%)   | 18 | Net income | 27 |     1. Calculate the following ratios AND interpret the result against the industry average: Ratio | Your Answer | Industry Average | Your Interpretation (Good-Fair-Low-Poor) | Profit margin on sales |   | 3% |   | Return on assets |   | 9% |   | Receivable turnover |   | 16X |   | Inventory turnover |   | 10X |   | Fixed asset turnover |   | 2X |   | Total asset turnover |   | 3X |   | Current ratio |   | 2X |   | Quick ratio |   | 1.5X |   | Times interest earned |   | 7X |   |   2. Analysis: Give your......

Words: 607 - Pages: 3

Premium Essay

Account

...performance.    Balance Sheet as of December 31, 2010 | Gary and Company | Cash   | $45 |   | Accounts payables   | $45 | Receivables     | 66 |   | Notes payables  | 45 | Inventory | 159 |   | Other current liabilities  | 21 | Marketable securities | 33 |   | Total current liabilities | $111 | Total current assets  | $303 |   |   |   | Net fixed assets   | 147 |   | Long Term Liabilities |   | Total Assets   | $450 |   | Long-term debt   | 24 |   |   | Total Liabilities  | $135 |   |   |   |   |   |   | Owners Equity |   |   |   | Common stock | $114 |   |   | Retained earnings | 201 |   |   | Total stockholders’ equity | 315 |   |   |   | Total liabilities and equity | $450 |       Income Statement Year 2010 |   |   | Net sales | $795 | Cost of goods sold  | 660 | Gross profit   | 135 | Selling expenses   | 73.5 | Depreciation | 12 | EBIT | 49.5 | Interest expense   | 4.5 | EBT | 45 | Taxes (40%)   | 18 | Net income | 27 |     1. Calculate the following ratios AND interpret the result against the industry average: Ratio | Your Answer | Industry Average | Your Interpretation (Good-Fair-Low-Poor) | Profit margin on sales |   | 3% |   | Return on assets |   | 9% |   | Receivable turnover |   | 16X |   | Inventory turnover |   | 10X |   | Fixed asset turnover |   | 2X |   | Total asset turnover |   | 3X |   | Current ratio |   | 2X |   | Quick ratio |   | 1.5X |   | Times interest earned |   | 7X |   |   2. Analysis: Give your......

Words: 607 - Pages: 3

Premium Essay

Carnival Cruise

...billion. What caused this decrease even with higher total revenue was an increase in their cost of goods sold. In the previous quarter cost of goods sold was 66% of sales and now is 70% of sales. Below are a few financial ratios to determine the company’s possible financial strengths and weaknesses based on last quarter. Liquidity: * Liquidity ratios show the company’s overall financial health by determining how the company can cover its liabilities with their assets. Current ratio looks at how the company can pay off their short-term liabilities from their current assets. Quick ratio or acid test ratio determines how they can pay of their short-term obligations by their current assets, not including inventories. Inventory to net working capital looks at the company’s inventory balances by measuring their cushion of excess current assets over current liabilities. Cash ratio determines which of the company’s capital is in cash or cash equivalents. Current Ratio: .20 Quick (Acid Test) Ratio: .16 Inventory to Net Working Capital: -.05 Cash...

Words: 1477 - Pages: 6

Premium Essay

Interpreting Financial Statements

...ratios are: Current ratio Walmart Target 2014 2013 2013 Current Assets 61,185,000 59,940,000 16,388,000 Current Liabilities 69,345,000 71,818,000 14,031,000 0.88 0.83 1.17 We can see that Walmart have current ratio below one meaning that all existing current assets will not be sufficient to pay off the current debt. Target have a better ratio than Walmart it means they have 1.17 of current assets of every dollars to pay off their current liabilities. Quick ratio Walmart Target Current assets-inventory 16,327,000 16,137,000 8,485,000 Current liabilities 69,345,000 71,818,000 14,031,000 0.24 0.22 0.60 This ratio shows that Walmart have only 0.24 to pay every dollar of current debt, it means it does not include the inventory to pay off the current liabilities. In this case the ratio is better than Walmart even though is not at least equals to 1 it is in better shape than Walmart having 0.60 compares to 0.22 in the year 2013. Inventory Turnover Walmart Target Cost of goods sold 358,069,000 352,297,000 50,568,000 Inventory 44,858,000 43,803,000 7,903,000 7.98 8.04 6.40 This ratio shows the numbers of times the inventory turned in a year calendar. In this case Walmart have a better position than Target showing a better ratio meaning that Walmart turns the inventory more times in a year. Days sales of inventory Walmart Target 365 days...

Words: 1052 - Pages: 5