Week 3: Lecture

Asset Distribution

(See Amalgamated Hat Rack’s balance sheet for Dec 31, 2011 below)

			2010	2011
Assets
Cash and marketable securities			$355,000	$430,000
Accounts receivable			$555,000	$512,000
Inventory			$835,000	$755,000
Prepaid expresses			$123,000	$98,000
	Total current assets		$1,868,000	$1,795,000

Gross property, plant, and equipment			$2,100,000	$1,900,000
Less: accumulated depreciation			$333,000	$234,000
Net property, plant, and equipment			$1,767,000	$1,666,000
	Total assets		$3,635,000	$3,461,000

Liabilities and Owner's Equity
Accounts payable			$450,000	$430,000
Accrued expenses			$98,000	$77,000
Income tax payable			$17,000	$9,000
Short-term dept			$435,000	$500,000
	Total current liabilities		$1,000,000	$1,016,000

Long-term dept			$750,000	$660,000
	Total liabilities		$1,750,000	$1676,000

Contributed capital			$900,000	$850,000
Retained earnings			$985,000	$935,000
	Total owner's equity		$1,885,000	$1,785,000
		Total liabilities and owner's equity	$3,635,000	$3,461,000

Table: Amalgamated Hat Rack Balance Sheet as of December 31, 2011
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002)

It is useful to know what assets a company owns that are producing its revenue. A brief look at the company’s balance sheet can tell you that, and you can get a better appreciation of what specific assets has invested in by listing the assets and plotting them on a pie chart as shown below.

		Year-end FY 2011
Assets:
	Cash and marketable securities	$430,000
	Accounts receivable	512,000
	Inventory	755,000
	Prepaid expenses	98,000
	Property, Plant, & Equipment	1,666,000
	Total Assets:	$3,461,000

Looking at the chart, you can see that Amalgamated’s largest group of assets at the end of 2011was Property, Plant, and Equipment, followed by Inventory. Again, this is about what you would expect for a manufacturing company. Note that Amalgamated’s investment in Property, Plant, and Equipment at the end of 2011 was 49% of its total assets.

Question: Is this good or bad?

Answer: Again, you can’t tell without comparing Amalgamated’s asset distribution with that of other hat rack companies. If other companies are able to generate the same amount of sales with half the assets that Amalgamated has, you would suspect that Amalgamated has problems with productivity. On the other hand, if other companies had twice the assets that Amalgamated has, but still only generated the same amount of sales, you would feel pretty good about Amalgamated. This illustrates again, we emphasize, that almost everything in financial analysis is relative.