By now I was comfortable with the fact that Current Assets does not include cash.
I was working on a schweser question where company A purchases some portion of company B. The question goes on to ask
“The balance of A’s current assets as of December 1 2008, using the acquisition method is closest to:”
It is given that -company A had current assets of 100 prior to the acquisition -company B had current assets of 30 prior to the acquisition -company A paid 20 for the portion of company B
So, if the question were about Assets and not current Assets then I would immediately think (100+30-20). Since they mentioned current Assets I was like, aha, they are being tricky and in this case cash is not a current asset so I will not count it. The answer in that case would be 130.
Turns out the answer is 110. If you think you know the rationale here, would you please explain? Thanks a ton.
I don’t see what’s wrong with the answer. Current Assets = Cash and Equivalents + Accounts Receivable + Inventories.
You paid cash 20 for the company, this is your cash outflow. Thus, you get: prior current assets + additional current assets - cash paid.
You ignore cash in calculations of Net Operating Assets, FFCF, and other stuff when you need to actually calculate the net change in our cash position ex-ante sharehold’s contributions and borrowing.
You are 100% correct. The CFA II 2010 mock exam question 55 exhibits what you are describing. In that FCFF calculation, when they compute the WCInv, they ignore i.e. remove cash from Current Assets.
I read your last paragraph and unfortunately I’m still not clear. Never mind the ‘other stuff’ portion, I’m not clear about the crux of the matter. As I understand it:
include cash in current assets always except for:
1a. Net Operating Assets calculations 1b. WCInv calculation (this applies to FCFF and FCFE calcs)
Can you expand on, ‘you ignore cash in calculations when you need to actually calculate the net cahnge in cash position ex-ante [before] shareholder’s contributions and borrowing.’? That is the part that is causing me problems. Much, much appreciated.
The issue here is not whether cash is a current asset or not. It is rather simple: you paid cash to the outgoing shareholders to take hold of their shares. It isn’t like cash was transfered from acquirer to the acquiree balance sheet. So naturally there is cash missing from your final merged balance sheet.
Cash is removed from working capital when you’re using the change in working capital to determine the change in cash; e.g., CFO via the indirect method, or when computing free cash flow.
In M&A processes cash is not misssing, it is paid out to outgoing sharheolders. Othewise acquirer would pay cash for cash and it makes not sense and wouldn’t have any inflluence on acquisition price not on new merged BS (- cash out + cash in). Probably there are kind of merges which include target cash acquistion.
