primary financial statements and cash flows … class/session 2.11.21...analysis of financial...
TRANSCRIPT
Analysis of Financial Statements and
Statement of Cash Flows
BUS512M November 21, 2014
Session 2 8:00-11:30
Susan Crosson
Homework See Handout
Today’s Learning Outcomes
• Analyzing Financial Statements-common size FS, ratios
• Transaction Impact on Ratios
• Cash Flow ratios-Free cash flow; Cash conversion cycle
• Deriving Cash Flow from transactions-Direct method
• Deriving Cash Flow from Accrual Financial Statements-Indirect method
Financial statement relationships: Vertical Analysis Balance Sheet 12.31.Begin Balance Sheet 12.31.End
Cash Cash/TA Statement of Cash Flows 12.31.End Cash Cash/TA
Other CA Other CA/TA Cash-Operating IS, changes in CA&CL Other CA Other CA/TA
LT Assets LTInvt, PP&E, Intan./TA
Cash-Investing Changes in LTA LT Assets LTInvt, PP&E, Intan./TA
T Assets 100% Cash-Financing Changes in LTL, CC T Assets !00%
Change in Cash ?
C Liab. CL/TL+SHE Cash-12.31.Begin ? C Liab. CL/TL+SHE
LT Liab. LTL/TL+SHE Cash-12.31.End ? LT Liab. LTL/TL+SHE
CC CC/TL+SHE CC CC/TL+SHE
RE RE/TL+SHE Income Statement (year ending 12.31.) RE RE/TL+SHE
T L+SHE 100% Revenue 100% T L+SHE 100%
Expenses COGS,Oper.,Other/Sales
Net Income NI/Sales
Statement of Shareholders’ Equity (year ended 12.31.)
Contributed Capital Retained Earnings
12.31.Begin
NI XXXXXXXXXXXXXXX
Dividends XXXXXXXXXXXXXXX
Stock Issue XXXXXXXXXXXXXXXXX
12.31.End ? ?
Emory Inc. Solution: Common Sized FS Balance Sheet- Beginning Balance Sheet -Ending
Cash ? Computations Cash %
Other CA ? Other CA %
LT Assets ? LT Assets %
T Assets ? T Assets 100%
C Liab. ? C Liab. %
LT Liab. ? LT Liab. %
CC ? CC %
RE ? Income Statement RE %
T L+SHE ? Revenue 100% T L+SHE 100%
Expenses %
Net Income %
Statement of Shareholders’ Equity
Contributed Capital Retained Earnings
Beginning
NI XXXXXXXXXXXXXX
Dividends XXXXXXXXXXXXXX
Stock Issue XXXXXXXXXXXXXXXXX
Ending
ID5-1 Common Sized Financial Statements Bed, Bath & Beyond; Kelly Services; Bank of America; or Hewlett-Packard
Balance Sheet 1 2 3 4
Cash 34% 16% 9% 8%
Accounts Receivable 50 0 15 56
Inventories 0 39 7 0
Long-term Assets 1 32 19 10
Other Assets 15 13 50 26
Current Liabilities 76 22 47 41
Long-term Liabilities 15 7 19 14
Shareholders’ Equity 9 71 34 45
Sales of Goods 0% 100% 77% 0%
Sales of Services 100% 0 23 100
Cost of Goods Sold 0 60 59 0
Operating Expenses 96 34 31 101
Net Income 4 6 7 (1)
Annual Report Treasure Hunt-Find the 6 Key Numbers
• Revenue
• Income (Loss)
• Cash Flow from (used by) Operating Activities
• Assets
• Liabilities
• Stockholders’ Equity
Prove the Accounting Equation
Can you tell the type of business? Service, Retail, Manufacturing
Six key numbers
Total Assets
Total Liabilities
Total Equity
Revenue
Net Income (Loss)
Cash Flow from (used by) Operating Activities
Income Statement
Balance Sheet
Statement of Cash flows
Four Key Ratios: Profit Margin PROFITABILITY: Ability to earn a satisfactory net income
Total Assets
Total Liabilities
Total Equity
Revenue Net Income (Loss)
Cash Flow from (used by) Operating Activities
Revenue
Net Income
How well does management control expenses?
Four Key Ratios: Asset Turnover TOTAL ASSET MANAGEMENT: Ability to utilize all the assets of a company
in a way that maximizes revenue and minimizes investment.
Total Assets
Total Liabilities
Total Equity
Revenue Net Income (Loss)
Cash Flow from (used by) Operating Activities
Revenue
Average Total Assets*
How efficiently do assets generate revenue?
* Beginning + Ending Total Assets/2
Return on Assets
Profit Margin x Asset Turnover = Return on Assets
Revenue
Net Income Revenue
Average Total Assets X =
Net Income
Average Total Assets
Income
Average Total Assets
Return on Equity Net Income
Average Total SHE
Revenue
Net Income Revenue
Average Total SHE X =
Income
Average Total SHE
Four Key Ratios: Debt to Equity FINANCIAL RISK: Ability to use debt effectively without jeopardizing the
future of the company.
Total Assets
Total Liabilities
Total Equity
Revenue Net Income (Loss)
Cash Flow from (used by) Operating Activities
Total Liabilities
Total Equity
Who controls the company? What is the company’s level of financial risk?
BE 5-1 Ratio Analysis Coca-Cola & PepsiCo Compute profit margin, asset turnover, return on assets, return on equity, and debt to equity ratios for 2012. Comment on your findings.
Company 2012 2011
Coca-Cola Income Statement:
Sales $48,017 $46,542
Net Income 9,019 8,584
Coca-Cola Balance Sheet:
Assets $86,174 $79,974
Shareholders’ equity 33,168 31,921
PepsiCo Income Statement
Sales $65,492 $66,504
Net Income 6,178 6,443
PepsiCo Balance Sheet:
Assets $74,638 $72,882
Shareholders’ equity 22,399 20,899
Transactions Impact on Ratios
Operating Cycle Ratios Inventory:
Inventory Turnover = COGS/Average inventory
Average inventory = (Beginning + Ending)/2
Days Inventory on Hand = 365 days/Inventory turnover
Accounts Receivable:
A/R Turnover=Net Credit Sales/Average A/R
Average A/R= (Beginning + Ending)/2
Days Sales= 365/A/R Turnover
Operating Cycle= Days Inventory on Hand + Days Sales
Is there a Financing Gap?
Accounts Payable:
Accounts Payable Turnover = COGS/Average A/P
Average A/P = (Beginning + Ending)/2
Days Payables = 365 days/Accounts Payable Turnover
Financing Gap?
Operating Cycle - Days Payables= Financing Gap… BORROW SHORT TERM
OR
Days Payables – Operating Cycle= No Gap… Free Financing from Suppliers
Cash Conversion Cycle OPERATING ASSET MANAGEMENT: Ability to utilize current assets and liabilities in a way
that supports growth in revenues with minimum investment.
• Measures the time it takes from cash invested in inventory to cash received from customers versus the time it takes to pay suppliers. (The time required to make or buy products, finance the products, and to sell & collect for them.)
Days Inventory
+ Days Receivables
- Days Payables
Cash Conversion Cycle If Operating Cycle is > Days Payables then Financing Gap If Operating Cycle is < Days Payables then able to Self-finance
Operating Cycle
Example
In 2009 Coca-Cola had the following ratios:
• Days Inventory = 75 days
• Days Receivables = 40 days
• Days Payables = 45 days
Was there a financing gap?
Cash Flow Basics
• Ways a business gets and gives cash • Two Statement Formats-Direct and Indirect • Operating- from daily operations: Income Statement, current asset & current
liability activities
• Investing- noncurrent asset activities
• Financing- long-term liabilities and stockholders’ equity activities
• Key Numbers: – Net Cash provided by operating activities__________
– Net Cash used in investing activities_________
– Net Cash used in financing activities_________
– Net change in cash and cash equivalents_________
– Cash and cash equivalents at beginning of year_________
– Cash and cash equivalents at end of year_________
– In your opinion, what are the primary ways the company gets cash and
spends cash?
Find the following key numbers for the most current year
• Net Cash provided by operating activities__________
• Net Cash used in investing activities_________
• Net Cash used in financing activities_________
• Net change in cash and cash equivalents_________
• Cash and cash equivalents at January 1_________
• Cash and cash equivalents at December 31_________
• In your opinion, what are the primary ways the company gets cash and spends cash?
E14-4 Cash Management Policies Kraft Foods, Kellogg’s, General Mills
For each company compute the missing dollar amounts, and briefly describe the cash management policy.
Company Cash from
Operations Cash from
Investments Cash from Financing
Net Change in Cash
Kraft Foods $3,035 ? ($1,358) $1,255
Kellogg’s 1,758 (3,245) 1,317 ?
General Mills ? (1,871) (661) (148)
E2-2 Identifying financing, investing, and operating transactions
Listed below are 8 transactions. In each case, identify whether the transaction is an example of financing, investing, or operating activities and which of the financial statements it would affect.
1. Company borrowed $50,000 in cash, signed a 10-year note payable.
2. 20 units of inventory are purchased from suppliers on account for $12,000.
3. The utility bill is paid at the end of the month, $5,200.
4. Services are performed, and customers are billed for $13,000.
5. 5 parcels of real estate are purchased for a total of $55,000 in cash.
6. A long-term investment in a equity security is sold for $4,500 cash.
7. Principal payments are made on outstanding debts.
8. Cash is received from customers for services completed in the previous period.
E4-9 Preparing journal entries and T-account for cash Prepare journal entries for each cash transaction during January, prepare the cash T-account (assume beginning balance is $5,000).
1. Issued 600 shares of stock for $25 each.
2. Sold services for $4,000. 3. Paid wages of $1,600. 4. Purchased land as a long-term investment for $9,000. 5. Paid a $2,000 dividend. 6. Sold land with a book value of $3,000 for $3,500. 7. Paid $1,500 to the bank: $900 to reduce the principal on the outstanding loan and $600 as an interest payment. 8. Paid miscellaneous expenses of $1,800.
T-account for cash to Statement of Cash Flows
E14-9 Cash Flows from Transactions-Direct method
Prepare a statement of Cash flows (direct method) from Driftwood Shipbuilders following transactions during 2015: 1. Sold $6,000 of no-par common
stock. 2. Purchased $6,000 of inventory
on account. 3. Purchased new equipment for
$5,000 cash. 4. Collections on accounts
receivable totaled $10,000. 5. Made payments of $5,000 to
suppliers. 6. Declared and paid dividends of
$2,000. 7. Paid rent of $6,000 for the last
six months of 2011 and $6,000 for the first six months of 2012.
8. Made sales totaling $100,000; $35,000 on account and the remainder in cash.
9. Paid $40,000 in cash for miscellaneous expenses.
10. Sold investments with a cost of $20,000 for $25,000.
E14-11Cash effects Given the following information and that a machine with a cost of $8,000 was sold during 2015, answer the following questions;
1. How much machinery was purchased during 2015?
2. How much cash was collected on the sale of the machine?
2015 2014
Machinery $45,000 $20,000
Accumulated depreciation ($15,000) ($10,000)
Depreciation expense 7,000 6,000
Gain on sale of machine 2,000 500
Four Key Ratios: Cash Flow Yield LIQUIDITY: Ability to generate sufficient cash to pay bills when due and to meet
unexpected needs for cash.
Total Assets
Total Liabilities
Total Equity
Revenue Net Income (Loss)
Cash Flow from (used by) Operating Activities
Cash Flow Operating Activities
Net Income
Are operating activities generating sufficient cash flows?
Free Cash Flow
• The ability of a company to finance its growth from current operating cash flows and meet fixed commitments.
Cash Flow from Operating Activities
-Dividends
-Net Capital Expenditures
=Free Cash Flow
Deficiencies of Free Cash Flow
• No widely accepted definition of free cash flow.
• Absolute amounts, not ratios
• Not clear if large free cash flow is good and small free cash flow is bad.
• The only truly free cash flow is from operations because management is free to use them in a variety of ways.
Link between income statement and cash flow from operating activities:
Indirect Approach to Cash Flow Statement
Total Assets
Total Liabilities
Total Equity
Revenue Net Income (Loss)
Cash Flow from (used by) Operating Activities
Cash Flow Operating Activities
Net Income (Loss)
Revenue -Expenses = +Non-cash Expenses +Operating Working Capital (CA-CL)
Financial statement relationships: Vertical Analysis Balance Sheet 12.31.Begin Balance Sheet 12.31.End
Cash Statement of Cash Flows 12.31.End Cash
Other CA Cash-Operating IS, changes in CA&CL Other CA
LT Assets LTInvt, PP&E, Intan. Cash-Investing Changes in LTA LT Assets LTInvt, PP&E, Intan.
T Assets Cash-Financing Changes in LTL, CC T Assets
Change in Cash ?
C Liab. Cash-12.31.Begin ? C Liab.
LT Liab. Cash-12.31.End ? LT Liab.
CC CC
RE Income Statement (year ending 12.31.) RE
T L+SHE Revenue T L+SHE
Expenses COGS,Oper.,Other
Net Income
Statement of Cash Flows-Indirect Method
1. Compute change in cash from Beginning and Ending Cash on BS-THE ANSWER 2. Net Income, non-cash expenses, gains, & losses on the IS go to CF-Operating 3. Change in Current Assets and Current Liabilities accounts go to CF-Operating 4. Analyze Noncurrent Asset accounts for what goes in CF-Investing 5. Analyze Long-term Liabilities accounts for what goes in CF-Financing 6. Analyze Contributed Capital and Retained Earnings accounts for what goes in
CF-Financing.
P14-13 Statement of Cash Flows-Indirect method page 633 in text
E14-22 Cash from Operating Activities-Indirect method page 627 in text
Today we:
• Analyzed Financial Statements-common size FS, ratios
• Learned how Transactions Impact Ratios
• Cash Flow ratios-Free cash flow; Cash conversion cycle
• Derived Cash Flow from transactions-Direct method
• Derived Cash Flow from Accrual Financial Statements-Indirect method