Limitations of Financial Statements

Credit history check. Late penalty charge. Increases in sales with liberal credit policy must outweigh potential increases in bad debt. PowerPoint PPT presentation

Title: Limitations of Financial Statements

Limitations of Financial Statements

• Examine the limitations of financial statements

and investigate cash flow management

Limitations of Financial Statements

• Subject to earnings manipulation
• Use of estimates and allocation
• Use of historical costs
• Omission of resources and costs
• Delay in providing information

Nature of Product Life Cycle (1)

• Introduction
• Lack of Capital
• Poor cash flow
• Learning the business
• Poor financial information and inaccurate

predictions

• Growth
• High growth in sales and profits
• Highly strained capital
• Potential poor growth management (. )
• Likely cash flow problem to support growth
• High demand for financial information

Nature of Product Life Cycle (2)

• Maturity
• Strong Capital
• Positive cash flow
• Experienced management
• Timely and accurate financial information
• Sustaining market shares

• Decline/Renewal
• Declining market shares
• Adequate capital
• Underutilized financial information
• Developing new products

Product Life Cycle

Financing CF

Investing CF

Op. CF

Intro Growth Maturity Decline

Product Life Cycle Effects

• Introduction low profitability, does not

directly suggest negative operating cash flow

Cash Flow Analysis gt Issues and Concerns

• Interpretation of negative cash flow
• Poor performance?
• Poor working capital management?
• Both?
• Acquisition/disposal of fixed assets
• Disposal upgrading or liquidating?
• Acquisition renewal or expansion
• New Debts
• Debt issued refinancing or expansion
• Overall risk and type of debt
• New Equity issued
• Financing expansion or retiring debt

Cash Flow Analysis gt Issues and Concerns gt

Management

• Manage extra cash wisely, cash reserves may be

costly

Cash Flow Analysis gt Management gt Accounts

Receivable

• Take payment in advance whenever possible
• A/R management includes
• Partial payment upfront
• Credit history check
• Late penalty charge
• Increases in sales with liberal credit policy

must outweigh potential increases in bad debt

Cash Flow Analysis gt Management gt Inventory

• Be aware of slow-moving inventory
• Maintain low inventory levels
• Just in Time
• Economic Order Quantity
• Reorder point
• Know the market demand, seasons, technology
• Focus on high margin products, minimize loss

leaders

Cash Flow Analysis gt Management gt PPE

• Lease rather than buy new assets
• Sell and lease backed fixed assets that are

currently owned

Leases

• In some cases it is more advantageous to lease an

asset than to borrow money to purchase it. The

lessee can conserve cash (no large cash outlay)

Cash Flow Analysis gt Management gt Liabilities

• Dont pay checks and bills before they are due
• Negotiate with suppliers and other creditors for

discounts, and time before it is necessary