Chapter 1:

*Adjustments to convert the Accrued-Based income statement to a cash basis:

Income Statement Adjustment Account Cash Flow Account

Sales - Change in accounts receivable = Cash collected

Cost of goods sold - Change in accounts payable

+ Change in inventory = Cash paid to suppliers

Operating expenses - Change in operating accruals

+ Depreciation = Cash paid for
operating expenses

Interest - Change in accrued interest = Cash paid to

creditors

Taxes - Change in accrued taxes

- Change in deferred taxes = Cash paid for taxes
_________________ ___________________
Net Profit Operating Cash Flow

*PUR = EI – BI + COGS

Chapter 2:

Solvency measures :

Current ratio & quick ratio: pay off CL

• Current ratio = CA/CL
• Quick ratio = CA-Inv/CL

Net working capital : >0 funds financing CA ; <0 CL financing funds

• NWC = CA – CL
• NWC = WCR + NLB

Net liquid balance: more positive => more liquidity

• NLB = Cash + M/S- N/P – CMLTD
• WCR = A/R + INV +Pre- A/P

Working capital to sales ratio: the greater => the greater the reliance on external
funds
• WCR/S = WCR/S

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Liquidity measures:

*Cash conversion efficiency: CFFO/sales

*Cash conversion period = DIH + DSO - DPO

Days inventory held:

*DIH = Inv/(COGS/365)

Days sales outstanding:

*DSO = Rec/(Sales/365)

Days payables outstanding:

*DPO = Payables/(COGS/365)

Current liquidity index:

Cash assets t-1 + CFFO t
*CLI = ---------------------------------
N/P t-1 + CMLTD t-1

Lambda:
Initial liquid Total anticipated net cash flow
reserve + during the analysis horizon
*Lambda = -------------------------------------------------------------------
Uncertainty about the net cash flow during the
analysis horizon

Financial flexibility:

Higgins’ approach:
m(1-d)[1 + (D/E)]
*g = ----------------------------------
(A/S) - {m(1-d)[1 + (D/E)]}
S = prior-year sales
gS = change in sales during the planning year where g is the growth rate for sales.
A/S = target ratio of total assets to total sales
M = projected after-tax profit margin
D = target dividend payout ratio (i.e, ratio of dividends to earnings)
D/E = target debt to equity ratio.

Chapter 3:

Economic value added:

*EVA = operating profit (1-T) – (Cost of capital) (capital employed)

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Simple interest:
FV
*PV = -------------------
k
(1 + (------) x n)
365
Compound interest:
FV
*PV = --------------
k
(1+ -------)n
365
Net present value: <0 reject >=0 accept
CF1 CF2 CF3 CFn
*NPV = CFo + ------------- + ------------- + ------------ + .... + ------------
(1 + i x 1) (1 + i x 2) (1 + i x3) (1 + i x n)

*NPV = cash inflow – cash outflow

Perpetuity present value formula:

*NPV = CF/i

Valuing Changes in the Cash Conversion Period:

- Purchase Sale
*NPVCCP = --------------- + ----------------
(1 + i ) DPO (1 + i) DIH + DSO

*NPV CCP-Aggregate = NPVCCP x Daily Sales / i

- Purchase Sale
*∆ NPVCCP = [ -------------- - --------------- ] ln(1 + i)
(1+i)OC-CCPP (1+i)CCPO+DPO
Discount rate:
*kadj = krf + kavg + k∆

Kadj = risk adjusted discount rate

Krf = risk free rate
Kavg = risk premium for company’s typical project
K∆ = risk adjustment for specific project

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Chapter 4:

The cost of managing inventory:

*Total cost = Order Cost + Holding Cost = F x (T/Q) + H x (Q/2)

T = total inventory units demanded
Q = ordert quantity
F = fixed order cost per oder
H = holding cost per inventory unit

Economic order quantity:

*EOQ solution: SQRT (2xTxF/H)

*Number of orders: T/order size or EOQ
*Average inventory: EOQ/2
*Usage rate: T/D (D=number of days in the planning period)
*Reorder point: (T/D) x Delivery Time

Quantity discount:
*Total cost = F x (T/Q) + H x (Q/2) + (C’ x T)
C’ : cost per unit

Inventory turnover ratio:

*Sales or COGS / Inventory balance

Days COGS in inventory:

*Inventory balance / Daily COGS or Sales

Chapter 5:

Credit extension: NPV<0 do not extend credit, if >0 extend it

S - EXP(S)
*NPV = ----------------- - VCR(S)
1 + iCP

NPV = net present value of the credit sale

VCR = variable cost ratio
S = dollar amount of credit sale
EXP = credit administration and collection expense ratio
i = daily interest rate
CP = collection period for sale

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Chapter 6:

NPV of one day’s sales under new policy:

ZN =

[(1+g)SE](1-dN)PN (1-bN) / (1 + iDPN) PV discount pmts

+ [(1+g)SE](1-PN)(1-bN) / (1 + iCPN) PV non-discount pmts

- VCR [(1+g)SE] PV variable cost pmts

- EXPN [(1+g)SE] / (1 + iCPN) PV credit expense pmts

NPV of one day’s sales under existing policy:

ZE=

SE (1-dE)PE (1-bE) / (1 + iDPE) PV discount pmts

+ SE (1-PE)(1-bE) / (1 + iCPE) PV non-discount pmts

- VCR (SE) PV variable cost pmts

- EXPE / (1 + iCPE) PV credit expense pmts

Zn = NPV of new credit policy, one day’s sales

.g = percent growth of credit sales caused by new policy
Se = existing credit sales under present policy, per day
.dn = cash discount offered in new policy
.pn = percent of credit customers expected to take new cash discount
.bn = bad debt loss percent under new policy
.i = daily interest rate
DPn = cash discount period under the new policy
CPn = average collection period of paying customers under new policy
VCR = variable cost rate, per dollar of sales
EXPn = variable collection / credit administration cost ratio under new policy

NPV per day:

∆Z = ZN - ZE

IF ∆Z > 0 then Accept policy change

IF ∆Z < 0 then Reject policy change

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Chapter 7:

IP = dollar invoice price

DD = number of days that payment is delayed from date of purchase
DP = discount period
CP = credit period
.d = discount rate
.k = annual opportunity rate
.kb = annual borrowing rate
Fee = annual fee and intangible cost of late payment

When Days Delayed < Discount Period

*NPV = IP x (1-d) / (1 + (DD(k/365)))

When Days Delayed > Discount Period:

*NPV = IP / (1 + (DD(k/365)))

When Days Delayed > Credit Period:

IP x (1 +(DD-CP)x(f/365))
*NPV = ----------------------------------
(1 + (DD(k/365)))

Take or Leave a Discount:

*IP x (1-d) < IP / (1 + (CP-DP)x(k/365))
*k < (d/(1-d)) x (365/(CP-DP))