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Lecture Understanding Financial Statements

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Lecture Understanding Financial Statements Powered By Docstoc
					Lecture Series #1




          Budget Planning, Implementation and Monitoring
            First Step: Understanding Financial Statements – Corporate Approach




                                             Chris Droussiotis
                                             September 2011
    Table of Contents

       Accounting Definitions, Terms and Concepts
       Using Financial Statements
       Financial Ratio Analysis




    These slides could be obtain via the Instructor’s Web page at
    www.celeritymoment.com

2
    Accounting Definitions and Concepts

                                                                    A = Assets

             A = L + NW                                             L = Liabilities
                                                                    NW = Net Worth



            Own             Owe              Keep (Value Creation)
                                                                             Government
                         How did you pay for the Assets that you own         • Deficit or Surplus


     Similar Concepts in Other Areas of Finance:
     • Consumer finance: Value of the House = Mortgage + Equity
     • Corporation Value: Enterprise Value = Net Debt + Equity

3    • Investments: Value of the Investment: Margin Loan + Equity
    Accounting Definitions and Concepts


                    Book Value Vs Market Value
       Book Value                   Market Value
        Accounting                  Finance
        Fixed Assets                Financial Assets
        Corporate Taxation          Investment Taxation




4
    Accounting Definitions and Concepts


                Income Vs Cash

                  The Perfect World:
                  Every business is run like a lemonade Stand

                   Income Statement                       Cash Flow Statement
                   Lemonade Sales                         Profit                   $ 80.00
                     Sold 100 cups @ $1 each   $ 100.00
                   Expenses                               Plus Money that we owe      $0.00
                    Box of 100 Cups            $ 5.00     Less Money owed to us       $0.00
                    Lemonade concetrate        $ 5.00
                    4 Gallons of Water         $ 10.00
                   Total Expenses              $ 20.00     Net Working Capital        $0.00
                   Net Income (Profit)         $ 80.00    Cash                     $ 80.00


5
    Accounting Definitions and Concepts


                Income Vs Cash

                  Not So Perfect World:
                   The world of IOUs

                   Income Statement                       Cash Flow Statement

                   Lemonade Sales                         Profit                   $ 80.00
                     Sold 100 cups @ $1 each   $ 100.00

                   Expenses                               Plus Money that we owe      $0.00
                    Box of 100 Cups            $ 5.00     Less Money owed to us      -$1.00
                    Lemonade concetrate        $ 5.00
                    4 Gallons of Water         $ 10.00
                   Total Expenses              $ 20.00     Net Working Capital       -$1.00

                   Net Income (Profit)         $ 80.00    Cash                     $ 79.00



6
    Income Statement

       Measurement of Profit and Loss over a Period of Time
       Top Line to Bottom Line
       Revenue (Sales) Less Expenses = Profit or Loss




7
    Income Statement

         Income Statement (000's)                 2009        2010

    50   Revenues by Geography
    51    U.S.                                 800,000     920,000
    52    Europe                               120,000     140,000
    53    Asia                                  40,000      50,000
    54   Total Revenue                         960,000   1,110,000
    55
    56   Cost of Revenues by Geography
    57    U.S.                                 220,000    270,000
    58    Europe                               100,000    115,000
    59    Asia                                  25,000     35,000
    60   Total Cost of Revenue                 345,000    420,000
    62   Gross Profit                          615,000    690,000
    63
    64   Operating Expenses
    65   Administrative & General              145,000    165,000
    66   Marketing Expenses                     75,000     80,000
    67   Other Operating Expenses               10,000     12,000
    68   Total Operating Expenses              230,000    257,000
    69
    70   EBITDA                                385,000    433,000

    72   Depreciation & Amortization            60,000     65,000
    74   EBIT                                  325,000    368,000
    76   Interest Expense                      130,000    120,000
    78   EBT                                   195,000    248,000
    80   Taxes                           40%    78,000     99,200
    81
8   82   Net Income                            117,000    148,800
    Balance Sheet Statement

       It shows us on a snap shot the Wealth of the Company
       The statement is set-up in Order of Liquidity




9
     Balance Sheet Statement

          Balance Sheet (000's)                     2009         2010    $ Change    % Change

      6   Current Assets
      7   Cash                                   45,000       65,800       20,800       46.2%
      8   Accounts Receivable                    45,000       60,000       15,000       33.3%
      9   Inventories                            35,000       40,000        5,000       14.3%
     10   Prepaid Expenses                       10,000        9,000       (1,000)     -10.0%
     11   Total Current Assets                  135,000      174,800       39,800       29.5%

     13   Property and Equipment
     14   Land                                 2,500,000    2,500,000           -        0.0%
     15    Building                              450,000      550,000     100,000       22.2%
     16    Furniture & Equipment                  50,000       75,000      25,000       50.0%
     17   Total Gross P&E                      3,000,000    3,125,000     125,000        4.2%
     18   Less Accumulated Depreciaition        (300,000)    (365,000)    (65,000)      21.7%
     19   Net P&E                              2,700,000    2,760,000      60,000        2.2%

     21   Long-Term Investments                 200,000      250,000       50,000       25.0%

     23   Total Assets                         3,035,000    3,184,800     149,800        4.9%

     25   Liabilities and Owners Equity

     27   Current Liabilities
     28   Accounts Payable                       35,000       40,000        5,000       14.3%
     29   Accrued Income Taxes                   12,000       10,000       (2,000)     -16.7%
     30   Accrued Expenses                       10,000        8,000       (2,000)     -20.0%
     31   Current Portion of Long Term Debt      20,000       10,000      (10,000)     -50.0%
     32   Total Current Liabilities              77,000       68,000       (9,000)     -11.7%

     34   Long-Term Debt:                      1,200,000    1,180,000     (20,000)      -1.7%

     36   Deferred Income Taxes                  12,000       17,000        5,000       41.7%

     38   Total Liabilties                     1,289,000    1,265,000     (24,000)      -1.9%

     40   Owners' Equity
     41   Common Stock                         1,000,000    1,000,000           -        0.0%
     42   Paid-in-Capital                              -       25,000      25,000
     43   Retained Earnings                      746,000      894,800     148,800       19.9%

10   44

     46
          Total Owners' Equity

          Total Liabilities & Owner's Equity
                                               1,746,000

                                               3,035,000
                                                            1,919,800

                                                            3,184,800
                                                                          173,800

                                                                          149,800
                                                                                        10.0%

                                                                                         4.9%
     Cash Flow Statement

        It shows the Company’s Cash Inflow and Outflow over a period of time

        Differences between Income Statement and Cash Flow Statement
             Timing Differences (Working Capital Activities)
             Capital Expenses Vs Operating Expenses (Investment Activities)
             Financing Expenses not included in the Income Statement (Financing
              Activities)

        Represents the changes from last Year’s Balance Sheet to this Year’s
         Balance Sheet
             Asset goes Up = Cash Negative
             Asset goes down = Cash Positive
             Liability goes up = Cash Positive
             Liability goes down = Cash Negative
             Owner’s Equity goes up = Cash Positive
             Owner’s Equity goes down = Cash Negative
11
      Cash Flow Statement                                                       Adjusting Income to Cash


     Balance Sheet (000's)                     2009         2010    $ Change

     Current Assets                                                               Cash Flow Statement (000's)      2010
     Cash                                   45,000       65,800       20,800
     Accounts Receivable                    45,000       60,000       15,000      Net Income                    148,800
     Inventories                            35,000       40,000        5,000
     Prepaid Expenses                       10,000        9,000       (1,000)      Plus Depreciation             65,000
     Total Current Assets                  135,000      174,800       39,800       Plus Deffered Taxes            5,000
     Property and Equipment                                                       Cash Income                   218,800
     Land                                 2,500,000    2,500,000           -
     Building                               450,000      550,000     100,000
     Furniture & Equipment                   50,000       75,000      25,000
     Total Gross P&E                      3,000,000    3,125,000     125,000
     Less Accumulated Depreciaition        (300,000)    (365,000)    (65,000)
     Net P&E                              2,700,000    2,760,000      60,000

     Long-Term Investments                 200,000      250,000       50,000

     Total Assets                         3,035,000    3,184,800     149,800

     Liabilities and Owners Equity

     Current Liabilities
     Accounts Payable                       35,000       40,000        5,000
     Accrued Income Taxes                   12,000       10,000       (2,000)
     Accrued Expenses                       10,000        8,000       (2,000)
     Current Portion of Long Term Debt      20,000       10,000      (10,000)
     Total Current Liabilities              77,000       68,000       (9,000)

     Long-Term Debt:                      1,200,000    1,180,000     (20,000)

     Deferred Income Taxes                  12,000       17,000        5,000

     Total Liabilties                     1,289,000    1,265,000     (24,000)

     Owners' Equity
     Common Stock                         1,000,000    1,000,000           -
     Paid-in-Capital                              -       25,000      25,000
     Retained Earnings                      746,000      894,800     148,800
     Total Owners' Equity                 1,746,000    1,919,800     173,800


12   Total Liabilities & Owner's Equity   3,035,000    3,184,800     149,800
      Cash Flow Statement                                                       Working Capital Activities


     Balance Sheet (000's)                     2009         2010    $ Change

     Current Assets
     Cash                                   45,000       65,800       20,800
     Accounts Receivable                    45,000       60,000       15,000
     Inventories                            35,000       40,000        5,000
     Prepaid Expenses
     Total Current Assets
                                            10,000
                                           135,000
                                                          9,000
                                                        174,800
                                                                      (1,000)
                                                                      39,800
                                                                                Cash Flow Statement (000's)          2010

     Property and Equipment                                                     Net Income                        148,800
     Land                                 2,500,000    2,500,000           -
      Building                              450,000      550,000     100,000
                                                                                 Plus Depreciation                 65,000
      Furniture & Equipment                  50,000       75,000      25,000     Plus Deffered Taxes                5,000
     Total Gross P&E                      3,000,000    3,125,000     125,000
     Less Accumulated Depreciaition        (300,000)    (365,000)    (65,000)   Cash Income                       218,800
     Net P&E                              2,700,000    2,760,000      60,000

     Long-Term Investments                 200,000      250,000       50,000
                                                                                Working Capital Activities
                                                                                 Change in Accounts Receivable    (15,000)
     Total Assets                         3,035,000    3,184,800     149,800
                                                                                 Change in Inventory               (5,000)
     Liabilities and Owners Equity                                               Change in Prepaid Expenses         1,000
     Current Liabilities                                                         Change in Accounts Payable         5,000
     Accounts Payable                       35,000       40,000        5,000     Change in Accrued Income Taxes    (2,000)
     Accrued Income Taxes                   12,000       10,000       (2,000)
     Accrued Expenses                       10,000        8,000       (2,000)    Change in Accrued Expenses        (2,000)
     Current Portion of Long Term Debt      20,000       10,000      (10,000)
     Total Current Liabilities              77,000       68,000       (9,000)
                                                                                Total Change in Working Capital   (18,000)
     Long-Term Debt:                      1,200,000    1,180,000     (20,000)   Operating Cash Flow (OCF)         200,800
     Deferred Income Taxes                  12,000       17,000        5,000

     Total Liabilties                     1,289,000    1,265,000     (24,000)

     Owners' Equity
     Common Stock                         1,000,000    1,000,000           -
     Paid-in-Capital                              -       25,000      25,000
     Retained Earnings                      746,000      894,800     148,800
     Total Owners' Equity                 1,746,000    1,919,800     173,800

13   Total Liabilities & Owner's Equity   3,035,000    3,184,800     149,800
     Cash Flow Statement                                                          Investment Activities


     Balance Sheet (000's)                     2009         2010    $ Change

     Current Assets                                                             Cash Flow Statement (000's)                   2010
     Cash                                   45,000       65,800       20,800
     Accounts Receivable                    45,000       60,000       15,000    Net Income                                148,800
     Inventories                            35,000       40,000        5,000
     Prepaid Expenses                       10,000        9,000       (1,000)
                                                                                 Plus Depreciation                         65,000
     Total Current Assets                  135,000      174,800       39,800     Plus Deffered Taxes                        5,000
                                                                                Cash Income                               218,800
     Property and Equipment
      Land                                2,500,000    2,500,000           -
      Building                              450,000      550,000     100,000    Working Capital Activities
      Furniture & Equipment                  50,000       75,000      25,000     Change in Accounts Receivable             (15,000)
     Total Gross P&E                      3,000,000    3,125,000     125,000
     Less Accumulated Depreciaition        (300,000)    (365,000)    (65,000)
                                                                                 Change in Inventory                        (5,000)
     Net P&E                              2,700,000    2,760,000      60,000     Change in Prepaid Expenses                  1,000
                                                                                 Change in Accounts Payable                  5,000
     Long-Term Investments                 200,000      250,000       50,000
                                                                                 Change in Accrued Income Taxes             (2,000)
     Total Assets                         3,035,000    3,184,800     149,800     Change in Accrued Expenses                 (2,000)
     Liabilities and Owners Equity                                              Total Change in Working Capital            (18,000)
     Current Liabilities                                                        Operating Cash Flow (OCF)                 200,800
     Accounts Payable                       35,000       40,000        5,000
     Accrued Income Taxes                   12,000       10,000       (2,000)
     Accrued Expenses                       10,000        8,000       (2,000)   Investment Activities
     Current Portion of Long Term Debt      20,000       10,000      (10,000)    Capital Expenditures                     (125,000)
     Total Current Liabilities              77,000       68,000       (9,000)
                                                                                 Investments (Change)                      (50,000)
     Long-Term Debt:                      1,200,000    1,180,000     (20,000)   Total Financing Activities                (175,000)
     Deferred Income Taxes                  12,000       17,000        5,000
                                                                                Cash Available for Debt Service (CAFDS)    25,800
     Total Liabilties                     1,289,000    1,265,000     (24,000)

     Owners' Equity
     Common Stock                         1,000,000    1,000,000           -
     Paid-in-Capital                              -       25,000      25,000

14   Retained Earnings
     Total Owners' Equity
                                            746,000
                                          1,746,000
                                                         894,800
                                                       1,919,800
                                                                     148,800
                                                                     173,800

     Total Liabilities & Owner's Equity   3,035,000    3,184,800     149,800
     Cash Flow Statement                                                        Financing Activities


     Balance Sheet (000's)                     2009         2010    $ Change      Cash Flow Statement (000's)                   2010
     Current Assets
     Cash                                   45,000       65,800       20,800
                                                                                  Net Income                                148,800
     Accounts Receivable                    45,000       60,000       15,000       Plus Depreciation                         65,000
     Inventories                            35,000       40,000        5,000       Plus Deffered Taxes                        5,000
     Prepaid Expenses                       10,000        9,000       (1,000)
     Total Current Assets                  135,000      174,800       39,800      Cash Income                               218,800

     Property and Equipment                                                       Working Capital Activities
     Land                                 2,500,000    2,500,000           -
                                                                                   Change in Accounts Receivable             (15,000)
      Building                              450,000      550,000     100,000
      Furniture & Equipment                  50,000       75,000      25,000       Change in Inventory                        (5,000)
     Total Gross P&E                      3,000,000    3,125,000     125,000       Change in Prepaid Expenses                  1,000
     Less Accumulated Depreciaition        (300,000)    (365,000)    (65,000)
     Net P&E                              2,700,000    2,760,000      60,000
                                                                                   Change in Accounts Payable                  5,000
                                                                                   Change in Accrued Income Taxes             (2,000)
     Long-Term Investments                 200,000      250,000       50,000       Change in Accrued Expenses                 (2,000)
     Total Assets                         3,035,000    3,184,800     149,800      Total Change in Working Capital            (18,000)

     Liabilities and Owners Equity                                                Operating Cash Flow (OCF)                 200,800
     Current Liabilities
                                                                                  Investment Activities
     Accounts Payable                       35,000       40,000        5,000
     Accrued Income Taxes                   12,000       10,000       (2,000)      Capital Expenditures                     (125,000)
     Accrued Expenses                       10,000        8,000       (2,000)      Investments (Change)                      (50,000)
     Current Portion of Long Term Debt      20,000       10,000      (10,000)
     Total Current Liabilities              77,000       68,000       (9,000)
                                                                                  Total Financing Activities                (175,000)

     Long-Term Debt:                      1,200,000    1,180,000     (20,000)     Cash Available for Debt Service (CAFDS)    25,800
     Deferred Income Taxes                  12,000       17,000        5,000
                                                                                  Financing Activities
     Total Liabilties                     1,289,000    1,265,000     (24,000)       ST Debt Payments                         (10,000)
     Owners' Equity                                                                 LT Payments                              (20,000)
     Common Stock                         1,000,000    1,000,000           -        Equity Contribution                       25,000
     Paid-in-Capital                              -       25,000      25,000
                                                                                  Total Financing Activities                  (5,000)
     Retained Earnings                      746,000      894,800     148,800
     Total Owners' Equity                 1,746,000    1,919,800     173,800      Free Cash Flow                             20,800
15   Total Liabilities & Owner's Equity   3,035,000    3,184,800     149,800
     Cash Flow Statement                                        Recap


           Cash Flow Statement (000's)                  2010

       86 Net Income                                148,800     Balance Sheet (000's)          2009         2010      $ Change
       87 Plus Depreciation                          65,000
       88 Plus Deffered Taxes                         5,000     Retained Earnings           746,000      894,800       148,800
       89 Cash Income                               218,800

       91 Working Capital Activities
       92 Change in Accounts Receivable              (15,000)
       93 Change in Inventory                         (5,000)
       94 Change in Prepaid Expenses                   1,000
       95 Change in Accounts Payable                   5,000
                                                                    Timing Differences
       96 Change in Accrued Income Taxes
       97 Change in Accrued Expenses
                                                      (2,000)
                                                      (2,000)
                                                                    (Working Capital
       98 Total Change in Working Capital
       99
                                                     (18,000)       Activities)
      100 Operating Cash Flow (OCF)                 200,800

      102 Investment Activities
      103 Capital Expenditures                      (125,000)
      104 Investments (Change)                       (50,000)       Investment Activities
      105 Total Financing Activities                (175,000)
      106
      107 Cash Available for Debt Service (CAFDS)    25,800

      109 Financing Activities
      110   ST Debt Payments                         (10,000)
      111
      112
            LT Payments
            Equity Contribution
                                                     (20,000)
                                                      25,000
                                                                    Financing Activities
      113 Total Financing Activities                  (5,000)
      115 Free Cash Flow                             20,800
                                                                  Balance Sheet (000's)           2009         2010     $ Change
      117 Beginning Cash                             45,000


16    119 Ending Cash                                65,800       Current Assets
                                                                  Cash                          45,000       65,800        20,800
     Financial Analysis

        Management Discussion and Analysis (MD&A)

        Equity & Bond Research – Wall Street Analysts

        The Financial Statements could be used by analysts to project the
         Company’s performance and valuation

        For an effective performance of the Company, you need to ask the three
         following questions:
         1.   How is the Company doing versus Last Year
         2.   How is the Company doing versus its competitors / piers/ market
         3.   How is the Company doing versus expectations



17
     Financial Ratio Analysis

        Trend Analysis

                               2010   Definition

     Trend Analysis Ratios
      U.S. Revenue Growth     15.0%   (Rev 2010/Rev 2009) -1
      Europe Revenue Growth   16.7%
      Asia Revenue Growth     25.0%
     Total Revenue Growth     15.6%

     EBITDA Growth            12.5%   (EBITDA 2010/EBITDA 2009) -1




18
     Financial Ratio Analysis

        Liquidity Ratio
             How well the Company manages Cash

                                           2010    Definition
     Liquidity Ratios
     Current Ratio                         2.57x   CA/CL
     Quick ratio                           1.85x   (Cash + A/R) / CL
     Accounts Receivable Turnover (ART)   21.14x   Revenue/Avg AR
     Accounts Receivable Days             17.26    365 / ART




19
     Financial Ratio Analysis

        Solvency Ratio
             How well the Company manages Debt

                                              2010    Definition
     Solvency Ratios
     LTD / Total Capitalization              38.1%    LTD / (LTD + Equity)
     EBITDA / Interest (Coverage Ratio)       3.61x   EBITDA / Interest
     LTD / EBITDA (Leverage Ratio)            2.73x   LTD / EBITDA




20
     Financial Ratio Analysis

        Activity and Operating Ratios
              It measures productivity and efficiency for running the business

                                                               2010      Definition
      Activity Ratios / Operating Ratios
       Inventory Ratio (IR)                                  11.20x      Cost of Revenues/Avg Inventory
      Inventory Ratio - Days                                 32.59       365 / IR




     Please note that there are a lot of ratios establish by specialization (i.e. for a Hotel
     company is Occupancy Rate or for a Cable company is revenue per subscriber)



21
     Financial Ratio Analysis

        Profitability Ratio
             How profitable is the company

                                               2010   Definition
     Profitability Ratios
     Gross Margin                             62.2%   Gross Margin / Revenues
     EBITDA Margin                            39.0%   EBITDA / Revenue
     EBIT Margin                              33.2%   EBIT / Revenue
     Return on Assets (ROA)                    4.8%   NI / Avg Assets
     Gross Return on Assets                   11.8%   EBIT / Avg Assets
     Return on Equity (ROE)                    8.1%   NI / Avg Equity




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