[MUSIC] In the past weeks, we prepared the financial statements for the campus book store, and we tried to read and understand them. We did that for every particular year, either x1 or x2. Now we are in the position of analyzing the evolution of these financial statements. Actually, companies normally report the financial statements of the previous year besides the financial statements of the current year. So that the shareholders can better compare the results on the evolution. So let's take a look at the financial statements of the campus bookstore for the past two years, to have a more complete picture of the evolution of the business. If you look at the asset side, the most important account we have here is inventory. And so by looking at the numbers probably there are some questions raised. First, there's been an increase in inventory. Is this a cause of concern? Well, probably not because also the sales of the company have been increasing. So it's normal that inventory increases with sales. Now what about the level of inventory? Do we have a lot of inventory. Here we can make a little calculation, a little ratio. So we can estimate the days of sales of inventory. So what we do is take the cost of the sales, we divide them by 300 and 65 days, so we have the cost of sales per day. Another question is, how many days of cost of sales are in our inventory? What we find is that for year x1 we had inventory equivalent to 131 days of sales, whereas in year two this amount of this has been reduced to 116. This is obviously good news and shows that maybe we are a little bit more efficient at managing our inventories. Now the big question here is are these numbers really representative? Remember the balance sheet is a picture at the point in time. So what would happen for example if this business were seasonal? In that case all these numbers can fluctuate a lot, and the image can be very different depending at the moment you take the picture. So maybe here the inventory levels are very high because Christina is purchasing all the inventory to start the new term. So all of these are questions that you should pose to the managers of the company. Who are the ones that are familiar with the day to day operations of the business. Now let's continue with the next account. Accounts receivable. Remember these are the amounts that we are going to collect from customers. Specifically, these are the amounts that we have to collect from the school that pays that purchases on credit. The first thing that we observe is that there has been a big increase in accounts receivable. Here we may have a lot of questions. You see that we are not collecting from customers. Do we have like more bad quality customers? Maybe we have more a bigger percentage of corporate customers like the school or simply sales have increased and therefore accounts receivable have increased proportionately. Well what we can do is to compare the accounts receivable with the sales. If we estimate the average days of sales that are now in receivables we will find for year X1 that's 45 days and for year X2 that has increased to 49 day. That's the average time that it takes to our customers to pay us. And so there is one last question. Remember, the balance sheet is a picture of the point in time. So the question is, is this a seasonal business? For example, if we had a business where most of the sales took place during Christmas, if we take the picture maybe in October or November, we will see that there are a lot of inventories. Why? Because company's piling up inventories for the season that is going to start. However, if we take the same picture after Christmas, one month after Christmas, what we are going to see is a lot of receivables or a lot of cash. So the picture is going to be totally different for the same business, just because of seasonality. So, one of the limitations of the balance sheet, is that it is a picture at the point in time. Finally, we're going to talk about the last item here, cash. We have a lot of cash, and that's great. But you see here in current asset sheet, that there is this sort of cash cycle here. So we have cash, with that cash we purchase inventory. Inventory goes up, then we sell the inventory at the higher price, accounts receivable go up by a higher amount than the decreasing inventory. And finally, these accounts receivable translate into more cash. And so this cycle repeats itself and every time, if we are selling at the price higher than the original cost, we are increasing this amount of cash. Obviously, the counterpart of this is that on the owner's equity side we are getting richer and richer. But the tempo can be different. Remember, liquidity and profitability is not the same because there is a mismatch in time. Finally, on the asset side, you will see that we don't have that many current assets. That makes us think that probably this company is renting the premises where it is operating. Maybe in other businesses like this one they follow different strategy and they decide to invest in real estate to operate the business. In that case, the shape of the balance sheet would be a little bit different, of course. Also, note something about non current assets. We have here the software that is very much depreciated so, there is only one year left of software. So, the big question here is, by the end of year x3, will we have to purchase new software so, maybe that's another question we should ask Cristina. Now, let's go to the liability side. And the main liability we see here is accounts payable. The amount that we owe to the suppliers. Remember the suppliers are financing our purchases so we need to repay this amount at some point. What we see here is that there's been a decreasing accounts payable. So that can raise many questions. For example can we negotiate better payment terms? So can we delay those payments a little bit? Maybe we have new suppliers that are more demanding on payment terms. We have to study the reasons behind that change. The other question would be, is the level of accounts payable reasonable? Well we can make an estimation like before. So how many days of cost of sales are present in my accounts payable? If we make that estimation for your x1 we see that is going to be 131 days, whereas with x2 we use that amount to 99 days. Now 131 days it's a lot of days and so that makes us think that maybe there is a little bit of seasonality in this business so the picture we have taken at this point in time maybe it is not representative of the average amount of accounts payable throughout the year. So it may be the case that we have made most of our purchases maybe in the December in the month of December. And so, when we take the picture, we still have the debts with the suppliers. Next thing, if we compare current assets and current liabilities, we see that current assets are much bigger. And remember, current assets are cash or they are going turn into cash in the short run. So it's important that we have enough cash to repay the short end debt, the current liabilities that are going to be due within the next year. Actually if we just take cash the investment we have in the Apple stock remember that can be turned into cash at any moment and we take accounts receivable that are going also going to be collected very soon. With those three amounts, it's more than enough to cover all the obligations that we have in current liabilities. So, from this point of view, the company is financially sound. Actually we could take a different perspective on this. So, do we have enough long-term resources? Meaning all this equity that do, we don't need to return. And long term bank loan that we have to repay in the future. Do we have enough of those resources to cover the long term investments, the non current assets? Well, as you see here, from the balance sheet, we have plenty of them, and therefore, also from this point of view, we can see that the company's financially sound. Actually this is why the balance sheet is also called the statement of financial position because it's telling you how we are financing our different assets. [MUSIC]
