Working Capital Working capital is the capital of a company used in the daily trading activities and
Question:
Working Capital
Working capital is the capital of a company used in the daily trading activities and is calculated as current assets - current liabilities (Block et al., 2019).
Assets are economic resources controlled by a firm due to previous transactions or events from which future economic benefits may be obtained. Therefore, current assets are likely to remain in the business for not more than one year. For example, cash at hand, inventory (closing stock), debtors (accounts receivables), and prepayments.
On the other hand, liabilities are financial obligations that emanate from previous transactions. Their settlement results in the transfer of assets and other economic benefits from the business at a future date. Consequently, current liabilities must be settled in a period that is less than one year (Block et al., 2019). For example, bank overdrafts and short-term debts.
According to the quarterly "News Release and Financials" financial statement for Deere & Company downloaded in Week 1, the current assets are listed as follows:
CURRENT ASSETS(Millions)
Cash and cash equivalents$3,602
Marketable securities$609
Receivables from unconsolidated affiliates$38
Trade accounts and notes receivables$5,360
Financing receivables$27,294
Financing receivables securitized$44,478
Equipment on operating leases$7,504
Inventories$6,882
TOTAL$56,734
CURRENT LIABILITIES
Short term borrowings$10,008
Short term securitization borrowings$4,416
Payables to unconsolidated affiliates$147
Accounts payable and accrued expenses$8,630
Deferred income taxes$491
TOTAL$23,692
WORKING CAPITAL = Current assets - current liabilities
$56,734 - $23,692 = $33,042
Explain whether there are any issues Deere & Company should address in the liability section of the balance sheet.Then, explain how increasing interest rates would impact thiscompany.
Deere & company should cut down on short-term and long-term borrowings because they will cost the company huge sums of money during repayment because of the high-interest rates, service fees, and legal costs. Therefore, the firm may generate fewer profits at the end of the financial year.
An increase in interest rates will impact Deere & Company negatively because the company has long-term and short-term liabilities. Therefore, when the firm starts repaying the loans, it will incur additional costs brought about by high-interest rates. The company may realize fewer profits after a given financial year.
References
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019).Foundations of financial management(17th ed.). Retrieved fromhttps://www.vitalsource.com/
John Deere. (n.d.).Investor relations. Retrieved from https://investor.deere.com
Questions
Would you have different thoughts on whether they should be borrowing this much money if we knew what the borrowings were being put towards?
It's interesting to me that they have so much in long-term loans. If that money was being borrowed to create a new service line or acquire another business to suit a new need within the agricultural industry, do you think it would still make sense to try to decrease loans now?
Financial And Managerial Accounting The Basis For Business Decisions
ISBN: 9781260247930
19th Edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello