Chapter Thirteen

1
Chapter Thirteen

• Accounting and FinancialStatements

2
Types of Financial Information

• Managers, stakeholders concerned with past,
  present future performance
• Revenue
• Costs
• Profits
• Debt Loads
• Size of inventory
• Age of buildings

• Cash
• Investment activities
• Value of the Firm
• Return on investment
• Efficiency

3
Accounting Information

• Management
• Lenders and
• suppliers

• Plan and set goals
• Organize
• Lead and motivate
• Control
• Evaluate credit risks

14-4a
4
Accounting Information

• Shareholders andpotential investors
• Governmentagencies

• Evaluate soundnessof investments
• Confirm tax liabilities
• Confirm payroll deductions
• Approve new issues ofstocks and bonds

14-4b
5
Financial Management

• Functions of a Financial Manager
• Planning Cash flow projections, projecting debt
  requirements, Financial Projections
• Organizing Budget Allocation
• Controlling Budget Monitoring, comptrolling

6
Financial Management

• Budgets
• Financial statements of estimated revenues or
  income and expenses for a given period of time,
  usually a year.
• Used for Planning, Organization and Control
• Prepared in advance estimates of revenues and
  expenses
• Used to evaluate performance and take corrective
  action if actual figures do not agree with
  budgeted ones. (Control)

7
Financial Management

• Operating Budgets
• Estimate revenue and expenses for the enterprise
  for some period of time
• Capital Budgets
• sets forth the expenditures on capital items such
  as buildings, land and equipment
• Usually for a longer period of time(5 or more
  years)

8
Financial Management

• Cash Flow Budget or Forecast
• (Type of Operating Budget)
• Cash is important to the firms survival
• Cash Flow Budget shows all the cash receipts from
  every source as they are received and all cash
  payments as they are made.
• Purpose to ensure enough cash is on hand to meet
  cash obligations

9
Budgeting

• Elements of an operating Budget
• Projected Revenue
• Salary expenditures expenditures on employee
  salaries
• Operating expenditures short-term expenditures
  required to conduct business (Travel, Material
  and Supplies, Telephone charges, etc..)
• Capital expenditure Expenditures on long-term
  assets (Furniture, Building Renovations, etc..)

10
Financial Reporting

• Financial Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flows/ Statement of Changes in
  Financial Position
• Statement of Retained Earnings

11
Financial ReportingThe Balance Sheet

• A financial picture of a business as it existed
  on one particular day.
• Two sides to the balance sheet, which must always
  balance
• Assets
• Equities (LiabilitiesShareholders Equity)
• Assets Liabilities Shareholders Equity

12
Financial ReportingThe Balance Sheet

• Assets
• Goods and property owned by the enterprise as
  well as those owed to the enterprise
• E.g. Cash, Inventory, Land, Computers
• Liabilities
• Debts of the Enterprise
• E.g. Short-Term and Long-Term Loans
• Equity
• Money invested in the company by investors
• Money retained in the enterprise from its
  operations

13
Financial ReportingThe Balance Sheet - Assets

• Non-Current(Fixed) Assets
• Land
• Buildings
• Machinery
• Office Equipment
• Accumulated Depreciation
• Prepayments
• Intangibles

• Current Assets
• Cash
• Marketable Securities
• Accounts Receivable
• Provision for Bad Debts
• Inventories

14
A Note on Depreciation

• Depreciation represents the declining value of a
  large purchase.
• E.g. Facility bought in 1990 for 40m.
• Dont reflect that as a 40m expense in 1990
• 40m spread out over life of facility (e.g. 40
  years)
• Annual expense 1m

15
Financial ReportingThe Balance Sheet -
Liabilities/Equity

• Current Liabilities
• Accounts Payable
• Notes Payable
• Expenses Payable
• Taxes Payable
• Long-Term Liabilities
• Long-Term Debt

• Shareholders Equity
• Capital Stock
• Preferred Stock
• Common Stock
• Retained Earnings

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Balance Sheet - simple example

• Dickie Dees
• Funding Requirements
• Borrow 3,000 from bank
• Parents invest 2,000
• Business Requirements
• Bicycle 2,500
• Ice Cream 1,000
• Cash 1,500

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Dickie DeesBalance SheetAs at December 31,2004

• Cash 1,500
• Inventory 1,000
• Bicycle 2,500
• Total Assets 5,000

• Notes Payable 3,000
• Shareholders Equity 2,000
• Total Liabilities and Shareholders Equity 5,000

18
Financial ReportingThe Balance Sheet - Analysis

• The figures on the balance sheet can be analyzed
  in a number of ways
• Current Ratio (Total Current Assets/Total Current
  Liabilities)
• Acid Test/Quick Ratio (Total Current
  Assets-Inventory/Total Current Liabilities)
• Book Value (Total Assets - Total Liabilities)
• Debt to Equity Ratio (Total Liabilities/Shareholde
  rs Equity)
• Debt to Asset Ratio (Total Liabilities/Total
  Assets)

19
Financial ReportingThe Balance Sheet - Analysis

• Current Ratio (Total Current Assets/Total Current
  Liabilities)
• Current Ratio 2,500/3,000 0.83

20
Financial ReportingThe Balance Sheet - Analysis

• Acid Test/Quick Ratio (Total Current
  Assets-Inventory/Total Current Liabilities)
• Acid Test 1,500/3,000 0.50

21
Financial ReportingThe Balance Sheet - Analysis

• Book Value (Total Assets - Total Liabilities)
• Book Value 5,000-3,000 2,000

22
Financial ReportingThe Balance Sheet - Analysis

• Debt to Equity Ratio (Total Liabilities/Shareholde
  rs Equity)
• Equity Ratio 3,000/2,000 1.50
• Debt to Asset Ratio (Total Liabilities/Total
  Assets)
• Asset Ratio 3,000/5,000 60

23
Financial ReportingThe Income Statement

• Gives an indication of how a firm performed over
  a period of time, usually a year.
• Itemizes all revenues and expenses for the
  business enterprise to determine the profit
  earned or loss incurred.

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The Income Statement

• Key Terms
• Revenue/Gross Revenue Total money generated by
  sales of the product
• Cost of Goods Sold Total money spent to purchase
  or make the product
• Gross Margin/Gross Profit Profit from the sale
  of the Product (before expenses, interest and
  taxes)
• Expenses Costs incurred in the daily operation
  of the business (e.g. salaries, depreciation,
  heating, etc)

25
The Income Statement

• Key Terms (Continued)
• Net Income Before Interest and Taxes Profit
  after expenses have been deducted
• Interest Expenses Cost of paying interest on
  loans
• Net Income Profit after all expenses and taxes
  have been deducted.
• Dividends Paid (optional) Portion of Net Income
  going to shareholders as cash
• Retained Earnings (optional) Portion of Net
  Income remaining in the company

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Financial ReportingThe Income Statement -
Components

• Revenues
• Sales of Products
• Other investment activities
• Expenditures
• Inventories
• Salaries
• Overhead, supplies, etc..
• Interest on loans
• Taxes

• Retained Earnings
• Beginning of year
• End of year
• Dividends Paid
• Retained Earnings
• Earnings per Share

27
Financial ReportingThe Income Statement -
Components

• Gross Revenue
• Cost of Goods Sold
• (Inventory)
• Gross Margin (Gross Profit)
• Selling and Administration Expenses
• Depreciation on buildings and equipment

• Income Before Interest and Taxes
• Interest on Loans
• Income Before Taxes
• Taxes
• Net Income
• Dividends Paid
• Retained Earnings

28
Financial ReportingThe Income Statement - Dickie
Dees

• Gross Revenue(Sales) 1,000
• Cost of Goods Sold 400
• Gross Profit(Margin)
  600
• Cost of Sales Admin. 150
• Income Before Interest and Taxes 350
• Interest Expense 50
• Income Before Tax 300
• Income Tax(30) 90
• Net Income 210
• Dividends Paid 40
• Retained Earnings 170

29
Financial ReportingInterpreting the Income
Statement

• Gross Profit Margin
• Gross Profit/Total Revenue
• Profit Margin
• Net Income/Revenue
• Earnings per Share
• Net Income/ of Outstanding Shares

30
Financial ReportingInterpreting the Income
Statement - Example 1

• Gross Profit Margin
• Gross Profit 600
• Sales Revenue 1,000
• Gross Profit Margin 600/1,000 60
• Profit Margin
• Net Income 280
• Sales Revenue 1,000
• Net Profit Ratio 280/1,000 28
• Earnings per Share
• Net Income 280
• of Shares 2
• Earnings per Share 140

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Ratio Analysis Putting it all together

• Profitability ratios Profit generated relative
  to assets, equity, or sales
• Asset utilization ratio How assets are used to
  generate sales
• Liquidity ratios How easily company can meet
  short-term debt requirements
• Debt utilization ratios Use of debt to finance
  operations
• Per share data Company performance per owner.

14-10
32
Profitability Ratios

• Profit Margin
• Return on Assets
• Return on equity

14-11
33
Asset Utilization Ratios

• Receivables turnover
• Inventory turnover

14-12

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Liquidity Ratios

• Current ratio
• Quick ratio

14-13

35
Debt Utilization Ratios

• Debt to total assets
• Times interest earned

14-14

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Per Share Data

• Earnings per share
• Dividends per share

14-15

37
Financial ReportingOther Statements

• Balance Sheet and Income Statement do not say
• How financial position changes from period to
  period
• Where the profit went
• How cash was used
• Statement of Retained Earnings
• Statements of Changes in Financial Position