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					  4/2 Warm-up (1/3)
• Calculate this                       Profit and Loss Accounts for XYZ, Inc.
  business’s profitability                      For Year Ended (000s)
                              Total Revenue                         $          8,671,000 
  margins                     Cost of Revenue                       $          1,188,000 
  1. Gross Profit Margin      Gross Profit                           $
  2. Net Profit Margin        Operating Expenses                    
                              Research Development                  $          1,432,000 
                              SG & A                                $          2,973,000 
                              Total                                 $          4,405,000 
                              Operating Income                       $
                              Net Other Income (Expenses)           $             301,000 
                              Earnings Before Interest And Taxes     $
                              Interest Expense                      $                          -   
                              Income Before Tax                     $          3,379,000 
                              Income Tax Expense                    $          1,184,000 
                              Net Income                             $
  4/2 Warm-up (2/3)
• Calculate this                   Profit and Loss Accounts for ABC, Inc.
  business’s 
                                                                 $       69,943,000
  profitability margins   Total Revenue
                          Cost of Revenue                       $        15,577,000 
 1. Gross Profit Margin   Gross Profit                           $
                          Operating Expenses                    
 2. Net Profit Margin      Research Development                 $          9,043,000 
                           SG & A                               $        18,162,000 
                           Total                                $        27,205,000 
                          Operating Income                       $
                          Net Other Income (Expenses)           $              910,000 
                          Earnings Before Interest And Taxes     $
                          Interest Expense                      $                          -   
                          Income Before Tax                      $
                          Income Tax Expense                    $          4,921,000 
                          Net Income                             $
 4/2 Warm-up (3/3)
• Comment on the             Profit and Loss Accounts for ABC, Inc.

  Profitability of the    Total Revenue                          $       69,943,000

  businesses (XYZ vs.     Cost of Revenue
                          Gross Profit
                                                                $        15,577,000 
                                                                 $

  ABC)                    Operating Expenses
                           Research Development
                                                                
                                                                $          9,043,000 
                           SG & A                               $        18,162,000 
                           Total                                $        27,205,000 
                          Operating Income                       $
                          Net Other Income (Expenses)           $              910,000 
                          Earnings Before Interest And Taxes     $
                          Interest Expense                      $                          -   
                          Income Before Tax                      $
                          Income Tax Expense                    $          4,921,000 
                          Net Income                             $
    Window into Microsoft
                        2011                                                                    1996
Total Revenue                          $       69,943,000               Total Revenue                          $         8,671,000
Cost of Revenue                       $        15,577,000               Cost of Revenue                       $          1,188,000 
Gross Profit                           $       54,366,000               Gross Profit                           $         7,483,000
Operating Expenses                                                      Operating Expenses                    
 Research Development                 $          9,043,000               Research Development                 $          1,432,000 
 SG & A                               $        18,162,000                SG & A                               $          2,973,000 
 Total                                $        27,205,000                Total                                $          4,405,000 
Operating Income                       $       27,161,000               Operating Income                       $         3,078,000
Net Other Income (Expenses)           $              910,000            Net Other Income (Expenses)           $             301,000 
Earnings Before Interest And Taxes     $       28,071,000               Earnings Before Interest And Taxes     $         3,379,000
Interest Expense                      $                          -      Interest Expense                      $                          -   
Income Before Tax                      $       28,071,000               Income Before Tax                      $         3,379,000
Income Tax Expense                    $          4,921,000              Income Tax Expense                    $          1,184,000 
Net Income                             $       23,150,000               Net Income                             $         2,195,000
4/3 Warm-up
• If a business is experiencing DECREASING profit margins, 
  what can be said about the relationship between Revenue 
  & Costs?
• If a business is experiencing INCREASING profit margins, 
  what can be said about the relationship between Revenue 
  & Costs?
Microsoft’s Margins
  • Gross Profit Margin
    • 1996 = 86.3%
    • 2011 = 77.7%
  • Net Profit Margin
    • 1996 = 35.5%
    • 2011 = 38.8%
What’s Happening to Microsoft & Why?
                             Marketing




    External 
                  Strategy     Operations
  Environment




                             Finance
Microsoft Article
Explicit & Implicit
• EXTERNAL factors impacting Microsoft
  • Competitors
  • External environment (PEST)
• Microsoft STRATEGIES
  • Response to external factors
• Microsoft MARKETING
  • Satisfying customer’s needs
• Microsoft OPERATIONS
  • Resources & processes to satisfy customers.
• Microsoft FINANCE
  • Working Capital
  • Capital Expenditures
4/4 Quiz
1. Identify where you can find the following
   information (Income Statement or Balance Sheet)
 a)   Total value of Equipment & Property
 b)   Total amount of Debt owed 
 c)   Total amount of revenue generated
 d)   Total amount of Interest Paid
 e)   Total amount of Retained Profit
 f)   Total amount of Cash on hand
 g)   Total amount Owed by Customers (Debtors)
 h)   Total amount Owed to Suppliers (Trade Credit)
 i)   Total spent to make products sold
 j)   Total value of Stock (inventory) on hand
 k)   Total amount of capital invested by owners
Objective
• Calculate financial ratios for a business using the Profit & 
  Loss Account (Income Statement) and Balance Sheet
• Interpret the financial performance of a business using 
  Ratio Analysis
• Analyze the impact of strategic decisions on the core 
  functions of a business;
  • Marketing
  • Operations
  • Finance
Businesses
1.   Amazon
2.   AMR Corporation (American Airlines)
3.   Apple
4.   Boeing
5.   Google
6.   JC Penney
7.   Nordstroms
8.   Southwest Airlines
9.   Starbucks
Purpose of Ratio Analysis
• To analyze financial position
 • Liquidity situation?
 • Adequate amount of debt?
• To assess performance
 • Revenue growing?
 • Costs under control?
• Compare performance against projections
• Aid stakeholders in their decision making
How To Use Financial Ratios
                                    Inter-firm Comparisons
                                    Historical Comparisons
• Look at firm’s ratios over       • Compare similar
  time                               business’s in the same
• Identify trends                    industry
  • Assess performance over time     • Assess the firm’s relative
                                       performance
Calculating Ratios
1. Revenue Growth
2. Profitability Ratios
  a) Gross Profit Margin
  b) Net Profit Margin
3. Liquidity Ratios
  a) Current 
  b) Acid Test
4. Efficiency Ratios
  a) Stock Turnover (# times, # days)
  b) Return on Capital Employed
5. Debt Load (Risk)
  a) Gearing (aka “Leverage”)
 Group Warm-up
• How can the                    Revenue ($)         100%         100%
  Profitability Ratios be 
  used to determine                 - Cost of     - Cost of
                                 Revenue ($)         Rev%
  the % of revenue                                              -Cost of
  used for paying              = Gross Profit     = GPM%          Rev%
                                          ($)
  operating costs;                                            -Expenses
                               - Expenses ($)
   1. Cost of Revenue?                                               %

   2. Expenses?                    = EBIT ($)                  = NPM %


                             GPM = Gross Profit Margin (Gross Profit /
                                            Revenue)
                             NPM = Net Profit Margin (EBIT / Revenue)
Ratio Analysis Wrap-up
• Work in your groups, discuss the financial performance of 
  each company.
• Rank the companies according to their investment 
  potential & explain why.
  • Top = companies your group would invest in
  • Bottom = companies your group would not invest in
• What other information would you consider before making 
  an investment?

				
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