3JM Company Inc.

Published Articles by David Balovich

Published in: Creditworthy News
Date: 12/3/98


The first group of assets on the balance sheet are the current assets. These are the most liquid of the firm's resources. Current
assets is also referred to as the firm's net working capital. Current assets minus current liabilities equals the firm's net working
capital. Net working capital is what resources the firm has left after paying it's current obligations.

The current assets are presented on the balance sheet in order of liquidity. Cash, the most readily available asset for use in
meeting obligations as they become due, is listed first. Cash includes amounts on deposit in checking and savings accounts as
well as cash on hand.

We should ask questions to determine if any of the cash is restricted. Restricted cash is unavailable for use as it would be tied
up in compensating balances against outstanding loans or tied to outstanding letters of credit. If there is restricted cash then the
amount should be deducted from the balance presented on the statement and restated.

The next item is usually marketable securities that are intended to be liquidated in the near future. Marketable securities that the
firm intends to hold as long-term investments shouldn't be listed with current assets, but instead under a long-term investment
category included in or after fixed assets.

The position of marketable securities should be questioned so that we insure that it is properly placed on the balance sheet. If
incorrectly placed then we should reposition the numbers.

The next current asset would be accounts receivable. We need to determine if the figure represented is net or gross. If net,
then uncollectable dollars have been removed. We should also be asking the aging of the receivable, current, 1-30, 31-60,
etc., and most importantly if any one customer is responsible for 10% or greater of the receivable. Many analysts will further
reduce the A/R figure by any balances outstanding beyond 90 days that are not secured.

Inventory is not liquid at all but rather a valuation that not only effects working capital but also profit and loss. In next weeks
column we will discuss inventory, the methods of valuation and how it distorts working capital and gross and net profit.

Prepaid expenses are generally small, relative to the rest of the balance sheet. They would include such items as prepaid
insurance or rent. Prepaid expenses are grouped with current assets, through accounting convention, even though they will not
generally generate any cash to use for paying current liabilities.

Therefore, we should deduct prepaid expenses from the total of current assets and pretend they do not exist.

Management's role in creating the balance sheet is to list all of their resources and create a positive working capital picture.
Our role in financial analysis is to see as real a picture as possible of the firm's ability to meet it's obligations.

In order to do this we should question the source of each number represented and determine, for our purposes, whether the
numbers presented are adequate for our purposes. If not then we should adjust the numbers accordingly.

The result can mean the difference between positive net working capital and negative net working capital.

I wish you well.

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