Prospective Analysis REVIEW

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Prospective Analysis REVIEW"

Transcription

1 Prospective Analysis REVIEW Prospective analysis is the final step in the financial statement analysis process. It includes forecasting of the balance sheet, income statement and statement of cash flows. Prospective analysis is central to security valuation. Both the free cash flow and residual income valuation models described in Chapter 1 require estimates of future financial statements. We provide a detailed example of the forecasting process to project the income statement, the balance sheet, and the statement of cash flows. We describe the relevance of forecasting for security valuation and provide an example utilizing forecasted financial statements to implement the residual income valuation model. We discuss the concept of value drivers and their reversion to long-run equilibrium levels. In the appendix, we provide a detailed example of short-term cash flow forecasting. 9-1

2 OUTLINE The Projection Process Projecting Financial Statements Application of Prospective Analysis in the Residual Income Valuation Model Trends in Value Drivers Short-term Forecasting (Appendix) 9-2

3 ANALYSIS OBJECTIVES Describe the importance of prospective analysis. Explain the process of projecting the income statement, the balance sheet and the statement of cash flows. Discuss and illustrate the Importance of Sensitivity Analysis. Describe the implementation of the projection process in the valuation of equity securities. Discuss the concept of value drivers and their reversion to long-run equilibrium levels. 9-3

4 QUESTIONS 1. Prospective analysis is central to security valuation. All valuation models rely on forecasts of earnings or cash flows that are, then, discounted back to the present to arrive at the estimated value of the security. Prospective analysis is also useful to examine the viability of companies strategic plans, that is, whether they will be able to generate sufficient cash flows from operations to finance expected growth or whether they will be required to seek external financing. In addition, prospective analysis is useful to examine whether announcing strategies will yield the benefits expected by management. Finally, prospective analysis can be used by creditors to assess companies ability to meet debt service requirements. 2. Prior to the forecasting process, financial statements can be recast to better portray economic reality. Adjustments might include elimination of transitory items or reallocating them to past or future years, capitalizing (expensing) items that have been expensed (capitalized) by management, capitalizing operating leases and other forms of off-balance sheet financing, and so forth. 3. In addition to trend analysis, analysts frequently incorporate external (non-financial) information into the prospective process. Some examples are the expected level of macroeconomic activity, the degree to which the competitive landscape is changing, any strategic initiatives that have been announced by management, and so forth. 4. The forecast horizon is the period for which specific estimates are made. It is usually 5-7 years. Forecasts beyond the forecast horizon are of dubious value since estimates are uncertain. 5. Since all valuation models are infinite horizon models, analysts frequently assume a steady state into perpetuity after the forecast horizon. A common assumption is that the company will grow at the long-run rate of inflation, that is, remaining constant in real terms. 6. The projection process begins with an expected growth in sales. Gross profit and operating expenses are, then, estimated as a percentage of forecasted sales using historical ratios and external information. Depreciation expense is usually estimated as a percentage of beginning gross depreciable assets under the assumption that depreciation policies will remain constant. Interest expense is usually estimated at an average borrowing rate applied to the beginning balance of interest bearing liabilities. Projections of expected interest rates are used for variable rate indebtedness and new borrowings. Finally, tax expense is estimated using the effective tax rate on pre-tax income. 7. In the first step, balance sheet items are projected using forecasted income sales (COGS) and relevant turnover ratios. Long-term assets are projected using forecasted capital expenditures. Long-term liabilities are projected from current maturities of longterm debt disclosed in the debt footnote, and paid-in-capital is assumed to be constant in this stage. Retained earnings are projected adding (subtracting) projected profits (losses) and subtracting projected dividends. Once total liabilities and equities are forecasted, total assets is set equal to this amount and forecasted cash is computed as the plug figure. 9-4

5 In the second step, long-term liabilities and equities are adjusted to yield the desired level of cash. The analyst must be careful to maintain the historical leverage ratio and adjust liabilities and equities proportionately. 8. The residual income model expresses stock price as the book value of stockholders equity plus the present value of expected residual income (RI). Residual income can be expressed in ratio form as, RI = (ROE t k) * BV t-1 Where ROE=NI t /BV t-1. This form highlights the fact that stock price is only impacted so long as ROE k. In equilibrium, competitive forces will tend to drive rates of return (ROE) to cost (k) so that abnormal profits are competed away. The estimation of stock price, then, amounts to the projection of the reversion of ROE to its long-run value for a particular company and industry. ROE is a value driver since it impacts our valuation of the stock price. Its components (asset turnover and profit margin) are also value drivers 9. We can make two observations regarding the reversion of ROE: a. ROEs tend to revert to a long-run equilibrium. This reflects the forces of competition. Furthermore, the reversion rate for the least profitable firms is greater than that for the most profitable firms. And finally, reversion rates for the most extreme levels of ROE are greater than those for firms at more moderate levels of ROE. b. The reversion is incomplete. That is, there remains a difference of about 12% between the highest and lowest ROE firms even after ten years. This may be the result of two factors: differences in risk that are reflected in differences in their costs of capital (k); or, greater (lesser) degrees of conservatism in accounting policies. The reversion of ROA and NPM are similar. While some reversion of TAT is evident, it is much less than that of the other value drivers. 10. Short-term cash forecasts are key to assessments of short-term liquidity. An asset is called "liquid" because it will or can be converted into cash within the current period. The analysis of short-term cash forecasts will reveal whether an entity will be able to repay short-term loans as planned. This also means such analysis is extremely important for a potential short-term credit grantor. Short-term cash forecasts often are relatively realistic and accurate because of the shortness of the time span covered. 11. A cash forecast, to be most meaningful, must be for a relatively short-term period of time. There are many unpredictable variables involved in the preparation of a reliable forecast for a highly liquid asset such as cash. Over a long period of time (that is, beyond the time span of one year), the difference in the degree of liquidity among items in the current assets group is usually insignificant. What is more important for long time spans are the projections of net income and other sources and uses of funds. The focus should be shifted to working capital (and other accrual measures), and away from cash flows, for longer forecast horizons of, say, thirty months where the time required to convert current assets into cash is insignificant. 9-5

6 12. Cash inflows and outflows are highly interrelated. These two flows are crucial to a company s circulation system." A deficiency in any part of the system can affect the entire system. For example, a reduction or cessation of sales affects the vital conversion of finished goods into receivables or cash, which in turn leads to a drop in the cash reservoir. If the system is not strengthened by "transfusion" (such as additional investment by owners or creditors), production must be curtailed or discontinued. Lack of cash inflows also will reduce other expenses such as advertising, promotion, and marketing expenses, which will further adversely affect sales. This can yield a vicious cycle leading to business failure. 13. Most would agree with this assertion. Cash is the most liquid asset and when management urgently needs to purchase assets or incur expenses, a cash exchange is the quickest and easiest means to execute a transaction. Moreover, unless management has a credit line established with a reliable outsider (such as a revolving account at a bank), lack of cash can mean a permanent loss of profitable opportunities. 14. Ratio analysis is a static measurement tool. Ratios measure relations among financial statement items as of a given moment and time. In contrast, funds flow analysis is a dynamic measure covering a period of time. A dynamic model of funds flow analysis uses the present only as a starting point and utilizes the best available estimates of future plans and conditions to forecast the future availability and disposition of cash or working capital. Analyzing funds flow also encompasses the projected operations of a company. Since one of the fundamental assumptions of accounting is the going-concern concept, some assert that the dynamic model is more realistic and is superior to static representations. However, care should be taken in placing too much reliance on funds flow analysis as it is primarily based on estimates, and not on realized observations. 15. Except for transactions involving the raising of money from external sources (such as through loans or additional investments) and the investments of money in long-term assets, almost all internally generated cash flows relate to and depend on sales. Accordingly, the usual first step in preparing a cash forecast is to estimate sales for the period under consideration. The reliability of any cash forecast depends on the accuracy of this forecast of sales. In arriving at the sales forecast, the analyst should consider: (1) past trends of sales volume, (2) market share, (3) industry and general economic conditions, (4) productive and financial capacity, and (5) competitive factors, among other variables. 9-6

7 EXERCISES Exercise 9-1 (45 minutes) Projected Income Statement for Year 12 Quaker Oats Company Forecasted Income Statement For Year Ended June 30, Year 12 Revenues [given]... $6,000.0 Costs and expenses Cost of goods sold [a]... $3,186.0 Selling, general, and administrative [b]... 2,439.4 Other expenses [c] Interest, net [d] Total costs and expenses... 5,752.0 Income from continuing operations Income taxes [e] Income before discontinued operations (Loss) on disposal of discontinued operations [given]... (2.0) Net income... $ Notes: [a] Cost of sales is estimated to be at a level representing the average percentage of cost of sales to sales as prevailed in the four-year period ending June 30, Year 11, which is 53.1% (19, ,331.3)/19, Therefore, 6,000 x.531 = $3,186. [b] Selling, general & administrative expenses in Year 12 are expected to increase by the same percentage as these expenses increased from Year 10 to Year 11, which is 15%. Therefore, $2,121.2 x 1.15 = $2, [c] Other expenses are expected to be 8% higher in Year 12. Therefore, 32.6 x 1.08 = $35.2. [d] Interest expense (net of interest capitalized) and interest income will increase by 6% due to increased financial needs. Therefore, $86.2 x 1.06 = $91.4 [e] The effective tax rate in Year 12 will equal that of Year 11, which is 42.7% ($175.7/$411.5). Therefore, tax expense = $248 x.427 = $

8 Exercise 9-2 (25 minutes) Spreadsheet to Compute Forecasts of Sales and Income Change In Dec. Change in Dec. Change In March Change in March Change In June Change In June Change In Sept. Change in Sept. Date Sales N.I. Sales NI Sales NI Sales NI Sales NI Dec-Y1 $17,349 $1,263 Mar-Y2 12, Jun-Y2 13,984 1,130 Sep-Y2 13, Dec-Y2 16,040 1,215 -$1,309 -$48 Mar-Y3 12,700 1,085 $422 $121 Jun-Y3 14, $582 -$474 Sep-Y3 14,669 1,206 $697 $210 Dec-Y3 17,892 1,477 1, Mar-Y4 12,621 1, Jun-Y4 14,725 1, Sep-Y4 14,442 1, Dec-Y4 17,528 1, Mar-Y5 14,948 1,372 2, Jun-Y5 17,630 1,726 2, Sep-Y5 17,151 1,610 2, Dec-Y5 19,547 1,865 2, Mar-Y6 16,931 1,517 1, Jun-Y6 18,901 1,908 1, Sep-Y6 19,861 1,788 2, Dec-Y6 22,848 2,067 3, Mar-Y7 19,998 1,677 3, Jun-Y7 21,860 2,162 2, Sep-Y7 21,806 2,014 1, Dec-Y7 24,876 2,350 2, Mar-Y8 22,459 1,891 2, Jun-Y8 24,928 2,450 3, Sep-Y8 23,978 2,284 2, Dec-Y8 28,455 2,671 3, Mar-Y9 24,062 2,155 1, Jun-Y9 27,410 2,820 2, Average change for each quarter $1, $ $1, $ $1, $ $1, $ Forecast Sep.Y9* 25, , Forecast Dec.Y9* 30, , Forecast Mar. Y0* 25, , Forecast Jun. Y0* 29, , * Most recent actual quarter + average change for the quarter. Note: Reported quarterly sales and net income for General Electric are: Sales Net income Sep Y9 $27,200 $2,653 Dec Y9 32,855 3,089 Mar Y0 29,996 2,

9 Exercise 9-3 (40 minutes) a. To illustrate how predictions of market share and total market sales can be used in the forecasting process, consider the following example. If an analyst, for instance, predicts that (i) Cough.com will maintain its 0.08% share of the market for children's cough medicine and (ii) total Industry sales of children's cough medicine for year 2006 is $3.2 billion, then a reasonable estimate of Cough.com's year 2006 sales is $2.56 million. This is computed as 0.08% market share multiplied by the expected $3.2 billion of industry sales. b. All relevant data should be sought out, subject to cost-benefit considerations, in the prediction of sales. The importance of sales to predictions of financial performance and financial condition cannot be overemphasized. Accordingly, companies invest considerable research and effort in predicting sales. Regarding what types of data to seek and how to obtain them, let s consider a retailer. To project the sales of a retailer, an analyst might consider visiting outlets that sell the retailers products and observe customer-buying patterns versus the patterns observed for key competing products. This activity can be done using anecdotal observation or using formal statistical sampling depending upon the analysts' perceived need for accuracy. Moreover, the analyst can seek information from insiders via interview or interpretation of formal or informal disclosures made by the company. The analyst can also review company strategies and industry trends. In sum, good predictions involve more than sophisticated models they demand that the analyst take the perspective of a customer constrained by the economic environment predicted to exist. c. Relying on predicted year 2006 total industry sales of $3.2 billion, the sales of Cough.com are predicted to be as follows 2006 Market share is 5% greater 2006 Market share is 5% worse [105% x.08%] x $3.2 billion [95% x.08%] x $3.2 billion = $2.688 million = $2.432 million d. What-If industry sales are 10% higher: [105% x.08%] x [110% x $3.2 billion] [95% x.08%] x [110% x $3.2 billion] = $ million = $ million What-If industry sales are 10% lower: [105% x.08%] x [90% x $3.2 billion] [95% x.08%] x [90% x $3.2 billion] = $ million = $ million 9-9

10 Exercise 9 4 A (30 minutes) Lyon Corporation Cash Forecast For July, Year 6 Beginning cash balance... $ 20 Cash collections Beginning accounts receivable... $ 20 Sales for month Less: Ending accounts receivable Cash available... $169 Cash disbursements 170 Beginning accounts payable Purchases (note a) Ending accounts payable (25% of purchases) Miscellaneous outlays Cash balance... $ 54 Minimum cash balance desired Excess cash... $ [a] Ending inventory... $ 15 Cost of goods sold (5/6 of sales) Less beginning inventory Purchases... $

11 PROBLEMS Problem 9-1 (90 minutes) a. Coca-Cola INCOME STATEMENT Year 3 Estimate Year 2 Year 1 Net sales 20,297 20,092 19,889 Cost of goods 6,106 6,044 6,204 Gross profit 14,191 14,048 13,685 Selling general & administrative expense 7,972 7,893 9,221 Depreciation & amortization expense Interest expense Income before tax 5,422 5,660 3,399 Income tax expense 1,620 1,691 1,222 Net income 3,802 3,969 2,177 Outstanding shares 3,491 3,491 3,481 RATIOS Sales growth 1.02% 1.02% Gross Profit Margin 69.92% 69.92% Selling General & Administrative Exp / Sales 39.28% 39.28% Depreciation (depn exp / pr yr PPE gross) 12.14% 12.14% INT (int / pr yr LTD) -5.45% -5.45% Tax (Inc Tax / Pre-tax inc) 29.88% 29.88% 9-11

12 Problem 9-1 continued BALANCE SHEET Year 3 Estimate Year 2 Year 1 Cash 587 1,934 1,892 Receivables 1,901 1,882 1,757 Inventories 1,066 1,055 1,066 Other 2,300 2,300 1,905 Total current assets 5,854 7,171 6,620 Property, plant & equipment 8,305 7,105 6,614 Accumulated depreciation 3,515 2,652 2,446 Net property & equipment 4,791 4,453 4,168 Other assets 10,793 10,793 10,046 Total assets 21,438 22,417 20,834 Accounts payable & accrued liabilities 3,717 3,679 3,905 Short-term debt & cmltd 3,899 3,899 4,816 Income taxes Total current liab 8,431 8,429 9,321 Deferred income, taxes & other 1,403 1,403 1,362 Long term debt 1,219 1, Total liabilities 11,053 2,622 2,197 Common stock Capital surplus 3,520 3,520 3,196 Retained earnings 19,674 20,655 18,543 Treasury stock 13,682 13,682 13,293 Shareholder equity 10,385 11,366 9,316 Total liabilities & net worth 21,438 22,417 20,834 RATIOS AR turn INV turn AP turn Tax Pay (Tax pay / tax exp) 50.33% 50.33% 49.10% FLEV Div/sh $1.37 $1.37 $1.21 CAPEX 1, CAPEX/Sales 5.91% 5.91% 5.86% 9-12

13 Problem 9-1 continued Statement of Cash Flows Year 3 Estimate Net income 3,802 Depreciation 863 Accounts receivable -19 Inventories -11 Accounts payable 38 Income taxes -36 Net cash flow from operations 4,636 CAPEX -1,200 Net cash flow from investing activities -1,200 Long term debt 0 Additional paid in capital 0 Dividends -4,783 Net cash flow from financing activities -4,783 Net change in cash -1,347 Beginning cash 1,934 Ending cash 587 b. Based on our initial projection of Coca-Cola s balance sheet, it appears that the company will require approximately $1.5 billion of external financing in Year 3. This amount will yield a cash balance of approximately $2 billion, consistent with prior years. 9-13

14 Problem 9-2 (95 minutes) a. Best Buy Income statement Year 3 Estimate Year 2 Year 1 Net sales 18,800 15,326 12,494 Cost of goods 15,048 12,267 10,101 Gross profit 3,752 3,059 2,393 Selling general & administrative expense 2,761 2,251 1,728 Depreciation & amortization expense Income before tax Income tax expense Net income Outstanding shares RATIOS Sales growth 22.67% 22.67% Gross Profit Margin 19.96% 19.96% Selling General & Administrative Exp / Sales 14.69% 14.69% DEPRECIATION (depn exp / pr yr PPE gross) 15.28% 15.28% Tax (Inc Tax / Pre-tax inc) 38.22% 38.22% 9-14

15 Problem 9-2 continued BALANCE SHEET Year 3 Estimate Year 2 Year 1 Cash Receivables Inventories 2,168 1,767 1,184 Other Total current assets 2,850 2,928 2,238 Property, plant & equipment 3,249 1,987 1,093 Accumulated depreciation Net property & equipment 2,403 1, Other assets Total assets 5,719 4,838 2,995 Accounts payable & accrued liabilities 3,034 2,473 1,704 Short-term debt & cmltd Income taxes Total current liab 3,284 2,714 1,785 Long term liabilities Long term debt Total long-term liabilities Common stock Capital surplus Retained earnings 1,650 1, Shareholder equity 2,246 1,821 1,095 Total liabilities & net worth 5,719 4,838 2,995 RATIOS AR turn INV turn AP turn Tax Pay (Tax pay / tax exp) 51.84% 51.84% 30.23% FLEV Div/sh $0.00 $0.00 $0.00 CAPEX 1, CAPEX/Sales 6.71% 6.71% 3.33% 9-15

16 Problem 9-2 continued Year 3 Statement of Cash Flows Estimate Net income 425 Depreciation 304 Accounts receivable -71 Inventories -401 Accounts payable 561 Income taxes 9 Net cash flow from operations 827 CAPEX -1,262 Net cash flow from investing activities -1,262 Long term debt -114 Additional paid in capital 0 Dividends 0 Net cash flow from financing activities -114 Net change in cash -550 Beginning cash 746 Ending cash 196 b. Based on our projection, it appears that Best Buy will require about $550 Million of external financing to yield a cash balance of approximately $750 million. Analysts must allocate this external financing between debt and equity so as to preserve the financial leverage level presently used by Best Buy. 9-16

17 Problem 9-3 (90 minutes) a. Merck INCOME STATEMENT Year 3 Estimate Year 2 Year 1 Net sales 56,435 47,716 40,343 Cost of goods 34,272 28,977 22,444 Gross profit 22,164 18,739 17,900 Selling general & administrative expense 7,725 6,531 6,469 Depreciation & amortization expense 1,661 1,464 1,277 Interest expense Income before tax 12,541 10,403 9,824 Income tax expense 3,762 3,121 3,002 Net income 8,779 7,282 6,822 Outstanding shares 2,976 2,976 2,968 RATIOS Sales growth 18.27% 18.27% Gross Profit Margin 39.27% 39.27% Selling General & Administrative Exp / Sales 13.69% 13.69% DEPRECIATION (depn exp / pr yr PPE gross) 8.76% 8.76% INT (int / pr yr LTD) 4.94% 4.94% Tax (Inc Tax / Pre-tax inc) 30.00% 30.00% 9-17

18 Problem 9-3 continued BALANCE SHEET Year 3 Estimate Year 2 Year 1 Cash 5,254 3,287 4,255 Receivables 6,168 5,215 5,262 Inventories 4,233 3,579 3,022 Other ,059 Total current assets 16,536 12,961 13,598 Property, plant & equipment 24,056 18,956 16,707 Accumulated depreciation 7,514 5,853 5,225 Net property & equipment 16,543 13,103 11,482 Other assets 17,942 17,942 15,075 Total assets 51,020 44,007 40,155 Accounts payable & accrued liabilities 6,983 5,904 5,391 Short-term debt & cmltd 4,067 4,067 3,319 Income taxes 1,897 1,573 1,244 Total current liab 12,947 11,544 9,954 Deferred income, taxes and other 11,614 11,614 11,768 Long term debt 4,787 4,799 3,601 Total liabilities 29,347 27,957 25,323 Common stock Capital surplus 6,907 6,907 6,266 Retained earnings 37,123 31,500 27,395 Treasury stock 22,387 22,387 18,858 Shareholder equity 21,673 16,050 14,832 Total liabilities & net worth 51,020 44,007 40,155 RATIOS AR turn INV turn AP turn Tax Pay (Tax pay / tax exp) 50.41% 50.41% 41.45% FLEV Div/sh $1.06 $1.06 $0.98 CAPEX 5, CAPEX/Sales 9.04% 9.04% 9.03% 9-18

19 Problem 9-3 continued Statement of Cash Flows Year 3 Estimate Net income $ 8,779 Depreciation 1,661 Accounts receivable -953 Inventories -654 Accounts payable 1,079 Income taxes 323 Net cash flow from operations 10,235 CAPEX -5,100 Net cash flow from investing activities -5,100 Long term debt -12 Additional paid in capital 0 Dividends -3,156 Net cash flow from financing activities -3,168 Net change in cash 1,967 Beginning cash 3,287 Ending cash 5,254 b. Based on our initial projections, it appears that Merck will have excess cash of approximately $2 billion in year 3. This excess cash should be used to reduce both debt and equity so as to maintain historical financial leverage. 9-19

20 Problem 9-4 (90 minutes) Historical Forecast Terminal figures Horizon Year Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 20x8 20x8 Sales growth 8.50% 10.65% 10.65% 10.65% 10.65% 10.65% 10.65% 3.50% Net profit Margin (Net income/sales) 6.71% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22% NWC turn (Sales/avg NWC) FA turn (Sales/avg FA) Total operating assets/total equity Cost of equity 12.5% ($ Thousands) Sales 25,423 28,131 31,127 34,443 38,112 42,171 46,663 48,297 Net income ($ Mil) 1,706 2,312 2,558 2,831 3,132 3,466 3,835 3,969 Net working capital 2,832 3,015 3,336 3,692 4,085 4,520 5,001 5,176 Fixed assets 15,232 17,136 18,961 20,981 23,216 25,689 28,425 29,420 Total Operating assets 18,064 20,151 22,297 24,673 27,301 30,209 33,426 34,596 L-T Liabilities 8,832 10,132 11,211 12,405 13,727 15,189 16,807 17,395 Total Stockholder's Equity ($ Mil) 9,232 10,019 11,086 12,267 13,574 15,020 16,619 17,201 Residual Income Computation Net Income 2,558 2,831 3,132 3,466 3,835 3,969 Beginning Equity 10,019 11,086 12,267 13,574 15,020 16,619 Required Equity Return 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% Expected Earnings 1,252 1,386 1,533 1,697 1,877 2,077 Residual Income 1,306 1,445 1,599 1,769 1,958 1,892 Discount factor Present value of residual income 1,161 1,142 1,123 1,105 1,086 Cum PV residual income 1,161 2,303 3,425 4,530 5,616 Terminal value of abnormal earnings 11,665 Beg book value of equity 10,019 Value of equity - Abnormal Earnings 27,301 Common shares outstanding (mil) 1,737 per share $

21 Problem 9-5 (90 minutes) a. Telnet Corporation Pro Forma Income Statement ($000s) Six Months Ended June 30, Year 2 Sales revenue ($250 x 6 mos.)... $1,500 Cost of goods sold (note [a])... 1,199 Gross margin Selling and administrative expenses ($47.5 x 6 mos.) Expected pre-tax income Estimated income taxes (at 50%)... 8 Expected net income... $ 8 Note [a]: We use T-accounts to compute cost of goods sold ($ thousands) Raw Material Inventory Beginning (given) 0 Material purchases ($125 x 6 mos.) To W.I.P. inventory [a] (plug) Ending (given) 35 Work in Process Inventory Beginning (given) 0 From raw materials inventory [a] 715 Labor ($30.5 x 6 mos.) 183 Variable overhead ($22.5 x 6 mos.) 135 Rent ($10 x 6 mos.) 60 Depreciation ($35 x 6 mos.) 210 Patent amortization ($.5 x 6 mos.) 3 7 Prepaid expenses (given) 1,299 To F.G. inventory [b] (plug) Ending (given) 0 Finished Goods Inventory Beginning (given) 0 From W.I.P. inventory [b] 1,299 1,199 Cost of goods sold (plug) Ending (given)

22 Problem 9-5 continued b. ASSETS Telnet Corporation Pro forma Balance Sheet ($000s) June 30, Year 2 Cash... $ 40 (minimum cash) Accounts receivable (45 days' sales)* Inventories ($35 + $100) (given) Prepaid expenses... 7 (given) Total current assets (subtotal) Equipment... 1,200 (given) Less accumulated depreciation ($35 x 6 mos.) Equipment, net (subtotal) Patents (given) Less amortization... 3 ($500 x 6 mos.) Patents, net (subtotal) Total Assets... $1,584 LIABILITIES AND STOCKHOLDERS EQUITY Accounts payable... $ 125 (30 days' purchases)** Accrued taxes... 8 (from Inc. Stmt.) Stockholders' equity... 1,300 (given) Retained earnings... 8 (from Inc. Stmt.) Additional funds needed "plug" Total liabilities and equity... $1,584 * ($250,000 x 6) / 180 days = $8,333 per day x 45 days = $375,000 ** ($125,000 x 6) / 180 days = $4,166 per day x 30 days = $125,

23 Problem 9-5 continued c. Telnet Corporation Forecasted Statement of Cash Flows For Six Months Ended June 30, Year 2 Cash balance, beginning... $ 60,000 Add collection of accounts receivable *... 1,125,000 $1,185,000 Less disbursements for Material purchases ** ,000 Labor ,000 Rent... 60,000 Overhead ,000 Selling expense ,000 (1,288,000) Tentative cash balance... $ (103,000) Minimum cash balance required... 40,000 Additional borrowing required... $ 143,000 Ending cash balance... $ 40,000 Loan balance... $ 143,000 * Collection of accounts receivable Jan. Feb. Mar. Apr. May June Sales Collections Accumulated Collections ,125 ** Payment of accounts payable Jan. Feb. Mar. Apr. May June Purchases Payments Accumulated Payments

24 Problem 9-6 (95 minutes) Quaker Oats Forecasted Statement of Cash Flows For Year Ended June 30, Year 12 Cash provided by (used for) operations Net income (a)... $ Items in income not affecting cash Depreciation & amortization (b) Deferred income taxes (c) Provision for restructuring charges (given) Increase in receivables (d)... (8.9) Increase in inventories (e)... (45.2) Increase in other current assets (f)... (25.6) Increase in accounts payable (g) Increase in other current liabilities (h) Cash provided by operating activities... $ Cash provided by (used for) investment activities Capital expenditures, PP&E (given)... $ (300.0) Asset retirements (given) Other changes (given)... (30.0) Cash used for investing activities... $ (310.0) Cash provided by (used for) financing activities Repayments of L-T debt (given)... $ (45.0) Net decrease in S-T debt (given)... (40.0) Cash dividend paid (given)... (135.0) Additions to L-T debt plug (i) Cash provided by financing activities... $(164.2) Net increase in cash (j)... $ 2.8 Cash, beginning balance Cash, balance at end of year... $ 33.0 Notes: (a) Average percent of income from continuing operations to sales, Years 9-11 ($ $ $148.9) / ($5, $5, $4,879.4) = 3.98% Net income in Year 12 = $6,000 x.0398 = $

25 Problem 9-6 continued (b) Depreciation and amortization in Year 12 = $238.8 x.8233 = $196.6 (c) Average percent of deferred income taxes (noncurrent) and other items to income from continuing operations, Years 9-11: $140.4 / $613.6 = 22.9% Noncurrent deferred income tax in Year 12 = $238.8 x.229 = $54.7 (d) Ending accounts receivable = $6,000 x (42/360) = $700.0 For Year 12: Accounts receivable, beg $691.1 Accounts receivable, end Increase $ 8.9 (e) Year 12 cost of sales = $6,000 x.51 = $3,060 Ending inventory = $3,060 x (55/360) = $467.5 For Year 12: Inventory, beg $422.3 Inventory, end Increase $ 45.2 (f) ($ $ $48.9)/3 = $25.6 (g) Year 12 purchases = $2,807.2 x 1.12 = $3,144.1 Accounts payable, end = $3,144.1 x (45/360) = $393.0 For Year 12: Accounts payable, beg $350.9 Accounts payable, end Increase $ 42.1 (h) ($ $ $53.1)/3 = $24.5 (i) Amount required to balance statement. (j) Percent of cash to revenues in Year 11 = $30.2 / $5,491.2 = 0.55% Year-end cash in Year 12 = $6,000 x 0.55% = $33 Increase in cash for Year 12 = $33 - $30.2 = $

26 CASES Case 9-1 (60 minutes) Kodak INCOME STATEMENT 20x7 Est 20x6 20x5 Net sales 12,515 13,234 13,994 Cost of goods 8,199 8,670 8,375 Gross profit 4,316 4,564 5,619 Selling general & administrative expense (except depreciation) 1,761 1,862 1,776 Depreciation expense Research & development costs Goodwill amortization Restructuring costs (credits) Earnings from operations 1, ,214 Interest expense Other expense (income) Income before tax ,132 Income tax expense Net income ,407 Outstanding shares RATIOS Sales growth -5.43% -5.43% Gross Profit Margin 34.49% 34.49% Selling General & Administrative Exp / Sales 14.07% 14.07% DEPRECIATION (depn exp / pr yr PPE gross) 5.90% 5.90% R&D/sales 5.89% 5.89% INT (int / pr yr STD and LTD) 6.49% 6.49% Tax (Inc Tax / Pre-tax inc) 29.63% 29.63% 9-26

27 Case 9-1 continued BALANCE SHEET 20x7 Est 20x6 20x5 Cash $ 17 $ 448 $ 246 Receivables 2,210 2,337 2,653 Inventories 1,075 1,137 1,718 Other Total current assets 4,064 4,683 5,491 Property, plant & equipment 13,972 12,982 12,963 (NOTE 4) Accumulated depreciation 8,089 7,323 7,044 Net property & equipment 5,883 5,659 5,919 Other assets 3,020 3,020 2,802 Total assets $12,967 $13,362 $14,212 Accounts payable & accrued liabilities 3,098 3,276 3,403 Short-term debt 1,378 1,378 2,058 Current maturities of l-t debt (NOTE 8) Income taxes Total current liab 5,033 5,354 6,215 Long term debt 1,653 1,666 1,166 Postemployment liabilities 2,728 2,728 2,722 Other long-term liabilities Total liabilities 10,134 10,468 10,784 Common stock Capital surplus Retained earnings 6,773 6,834 7,387 Treasury stock 5,767 5,767 5,808 Shareholder equity 2,833 2,894 3,428 Total liabilities & net worth 12,967 13,362 14,212 RATIOS AR turn INV turn AP turn FLEV Div/sh $2.22 $2.22 $1.88 CAPEX CAPEX/Sales 7.91% 7.91% 5.60% 9-27

28 Case 9-1 continued Statement of Cash Flows 20x7 Estim. Net income $ 582 Depreciation 766 Accounts receivable 127 Inventories 62 Accounts payable (178) Net cash flow from operations 1,359 CAPEX (990) Net cash flow from investing activities (990) Long term debt (156) Dividends (643) Net cash flow from financing activities (799) Net change in cash (431) Beginning cash 448 Ending cash $

29 Case 9-2 (120 minutes) Miller Company Cash Forecast For Years Ended December 31, Years 2 through 4 Year 2 Year 3 Year 4 Cash balance at beginning of period... $ 0 $1,929,000 $254,500 Cash received from stockholders , Proceeds of loan (see [a])... 1,700, ,000 0 Cash receipts less cash payments (see [b]) , , ,500 Payments for construction... 0 (1,700,000) (100,000) Payments on loan (see [a])... 0 (200,000) (200,000) Cash balance at end of period... $1,929,000 $ 254,500 $101,000 Supporting Schedules for the Cash Forecast [a] Schedule of interest and commitment fees Amount of Interest Loan or Fee Year 2: To be borrowed 1/1... $ 800,000 To be borrowed 4/ ,000 Commitment fee due 4/1 ($1,000,000 x 1% x 1/4)... $ 2,500 To be borrowed 7/ ,000 Commitment fee due 7/1 ($500,000 x 1% x 1/4)... 1,250 To be borrowed 12/ ,000 Commitment fee due 12/31 ($200,000 x 1% x 1/2)... 1,000 Interest due on loan: On 5%... 40,000 On 5% x 3/ ,750 On 5% x 1/2... 7,500 Total at 12/31/Year 2... $1,700,000 $71,000 Year 3: To be borrowed 4/ ,000 Commitment fee due 4/1 ($100,000 x 1% x 1/4) Repayment of loan: Due 6/30... (100,000) Due 12/31... (100,000) Interest due on loan: On 5% x 1/ ,250 On 5% x 1/ ,500 On 5% x 1/ ,500 Total at 12/31/Year 3... $1,600,000 $86,500 Year 4: Repayment of loan: Due 6/30... (100,000) Due 12/31... (100,000) Interest due on loan: On 5% x 1/ ,000 On 5% x 1/ ,500 Total at 12/31/Year 4... $1,400,000 $77,

30 Case 9-2 continued [b] Schedule of Operating Results Year 2 Year 3 Year 4 Results of operations Operating profit (at $.04 per ton handled)... $200,000 $212,000 $224,000 Interest and commitment fees (above)... 71,000 86,500 77,500 Cash derived from operations , , ,500 Depreciation (at $.03 per ton handled) , , ,000 Operating loss... $ 21,000 33,500 21,500 Operating loss from prior year(s)... 21,000 54,500 Accumulated operating loss... $ 54,500 $ 76,000 Interpretation and Evaluation As revealed in note [b], reporting on the "results of operations," Miller Company is expected to record operating losses for each of the next three years under analysis. Nevertheless, the analysis also reveals that Miller is expected to generate sufficient cash flow to cover the various cash commitments. 9-30

31 Case 9-3 (100 minutes) Royal Company Cash Forecast For Years Ending March 31, Years 6 and 7 Year 6 Year 7 Beginning balance of cash... $ 0 $ 75,000 Cash receipt from customers (see Schedule A) ,000 1,065,000 Cash disbursements Direct materials (see Schedule B) , ,000 Direct labor , ,000 Variable overhead , ,000 Fixed costs , ,000 Total cash disbursements , ,000 Operating cash receipts less disbursements... 75, ,000 Cash from sale of receivables and inventories... 90,000 0 Total cash available... $165,000 $ 285,000 Payments to general creditors... 90, ,000 2 Ending balance of cash... $ 75,000 1 $ 15,000 1 This amount could have been used to pay general creditors or carried forward to the beginning of the next year. 2 Computed as: ($600,000 x 60%) - ($50,000 + $40,000). Schedule A Cash Receipts from Customers Year 6 Year 7 Sales... $900,000 $1,080,000 Beginning accounts receivable ,000 Total ,000 1,155,000 Less: Ending accounts receivable... 75,000 90,000 Cash receipts from customers... $825,000 $1,065,000 Schedule B Cash Disbursements for Direct Materials Year 6 Year 7 Direct materials required for production... $200,000 $240,000 Required ending inventory... 40, ,000 4 Total , ,000 Less: Beginning inventory ,000 Purchases , ,000 Beginning accounts payable ,000 Total , ,000 Less: Ending accounts payable... 20,000 25,000 Disbursements for direct materials... $220,000 $245,000 3 Computed as: 12,000 units x 2/12 = 2,000; 2,000 x $20 per unit = $40, Computed as: 15,000 units x 2/12 = 2,500; 2,500 x $20 per unit = $50,

32 Case 9-4 (115 minutes) a. (1) Estimated Total Cash Receipts Sep. Oct. Nov. Dec. Total sales... $40,000 $48,000 $60,000 $80,000 Credit sales (25%)... 10,000 12,000 15,000 20,000 Cash sales... $30,000 36,000 $45,000 $60,000 Receipts of past month's credit sales 10,000 12,000 15,000 Total cash receipts... $46,000 $57,000 $75,000 (2) Estimated Cash Disbursements for Purchases Oct. Nov. Dec. Total Total Sales... $48,000 $60,000 $80,000 Purchases (70% next mo. sales)... $42,000 $56,000 $25,200 $123,200 Less: 2% purchase discount , ,464 Cash disbursements... $41,160 $54,880 $24,696 $120,736 (3) Estimated Cash Disbursements for Operating Expenses Oct. Nov. Dec. Total Sales... $48,000 $60,000 $80,000 Salaries and Wages (15%)... $ 7,200 $ 9,000 $12,000 $28,200 Rent (5%)... 2,400 3,000 4,000 9,400 Other Expenses (4%)... 1,920 2,400 3,200 7,520 Cash disbursements... $11,520 $14,400 $19,200 $45,120 (4) Estimated Total Cash Disbursements Oct. Nov. Dec. Total Purchases [part (2)]... $41,160 $54,880 $24,696 $120,736 Operating expenses [part (3)]... 11,520 14,400 19,200 45,120 Plant and equipment (given) ,000 Total cash disbursements... $53,280 $69,680 $43,896 $166,856 (5) Estimated Net Cash Receipts and Disbursements Oct. Nov. Dec. Total Total cash receipts... $46,000 $57,000 $75,000 $178,000 Total cash disbursements... 53,280 69,680 43, ,856 Net cash increase... $31,104 $ 11,144 Net cash decrease... $ 7,280 $12,

33 Case 9-4 continued (6) Estimated Financing Required Oct. Nov. Dec. Total Beginning cash balance... $12,000 $ 8,720 $ 8,040 $12,000 Net cash increase... 31,104 11,144 Net cash decrease... 7,280 12,680 Cash position before financing... $ 4,720 $(3,960) $39,144 $23,144 Financing required... 4,000 12,000 16,000 Interest expense 1... (180) (180) Financing retired... (16,000) (16,000) Ending cash balance... $ 8,720 $ 8,040 $22,964 $22,964 1 Computed as: ($4,000 x.06 x 3/12) + ($12,000 x.06 x 2/12). b. (1) Union Corporation Forecasted Income Statement For the Quarter Ended December 31, Year 6 Sales [see (1) in part a]... $188,000 Deduct Cost of goods sold (70% of sales)... $131,600 Less: Purchase discounts taken [see (2) in part a]... 2, ,136 Gross profit... 58,864 Selling and administrative expenses Salaries and wages [see (3) in part a]... 28,200 Rent [see (3) in part a]... 9,400 Other expenses [see (3) in part a]... 7,520 Depreciation ($750 x 3 months)... 2,250 Total selling and administrative expenses... 47,370 Operating income... 11,494 Interest expense Net income... $ 11,

34 Case 9-4 continued (2) Union Corporation Forecasted Balance Sheet As of December 31, Year 6 ASSETS Current Assets Cash [see (6) in part a]... $ 22,964 Accounts receivable (25% of Dec. sales)... 20,000 Inventory [($30, % of $36,000) x 98%]... 54,096 Total current assets... $ 97,060 Plant and equipment ,000 Less: Accumulated depreciation... 2,250 98,750 Total assets... $195,810 LIABILITIES AND EQUITY Liabilities... $ 0 Stockholders' equity ,810 Total liabilities and equity... $195,

In this chapter, we build on the basic knowledge of how businesses

In this chapter, we build on the basic knowledge of how businesses 03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize

More information

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

More information

Chapter 6 Statement of Cash Flows

Chapter 6 Statement of Cash Flows Chapter 6 Statement of Cash Flows The Statement of Cash Flows describes the cash inflows and outflows for the firm based upon three categories of activities. Operating Activities: Generally include transactions

More information

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

More information

MASTER BUDGET - EXAMPLE

MASTER BUDGET - EXAMPLE MASTER BUDGET - EXAMPLE Sales IN UNITS for the previous two months (of last quarter), as well as the sales forecast for next quarter are as follows: Sales Budget Units May sales (ACTUAL) 20 June sales

More information

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

More information

Understanding Cash Flow Statements

Understanding Cash Flow Statements Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

More information

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source:

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source: CASH FLOW STATEMENT On the statement, cash flows are segregated based on source: Operating activities: involve the cash effects of transactions that enter into the determination of net income. Investing

More information

Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of

More information

Cash Flow Analysis Modified UCA Cash Flow Format

Cash Flow Analysis Modified UCA Cash Flow Format Cash Flow Analysis Modified UCA Cash Flow Format Dr. Charles W. Mulford Invesco Chair and Professor of Accounting Scheller College of Business Georgia Institute of Technology Atlanta, GA 30332-0520 (404)

More information

FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT 100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II djohnston@becpas.com

More information

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments.

CHAPTER 23. Statement of Cash Flows 1, 2, 7, 8, 12 3, 4, 5, 6, 16, 17, 19 9, 20 4, 5, 9, 10, 11 10, 13, 15, 16. 7. Worksheet adjustments. CHAPTER 23 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Format, objectives purpose, and source of statement.

More information

Cash is King. cash flow is less likely to be affected

Cash is King. cash flow is less likely to be affected Reading 27: Understanding Cash Flow Statements Relevance of Cash Flow The primary purpose of the statement of cash flows (SCF) is to provide: Info about a firm s cash receipts & cash payments during an

More information

Credit Analysis 10-1

Credit Analysis 10-1 Credit Analysis 10-1 10-2 Liquidity and Working Capital Basics Liquidity - Ability to convert assets into cash or to obtain cash to meet short-term obligations. Short-term - Conventionally viewed as a

More information

Glossary and Formulas

Glossary and Formulas A-B Accounts Payable Includes, but is not limited to, Trade Accounts Payable and Trade Acceptances, that is, amounts owed to vendors for goods and services purchased from outside suppliers and due within

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

More information

6. Financial Planning. Break-even. Operating and Financial Leverage.

6. Financial Planning. Break-even. Operating and Financial Leverage. 6. Financial Planning. Break-even. Operating and Financial Leverage. Financial planning primarily involves anticipating the impact of operating, investment and financial decisions on the firm s future

More information

Preparing a Successful Financial Plan

Preparing a Successful Financial Plan Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

More information

It is concerned with decisions relating to current assets and current liabilities

It is concerned with decisions relating to current assets and current liabilities It is concerned with decisions relating to current assets and current liabilities Best Buy Co, NA s largest consumer electronics retailer, has performed extremely well over the past decade. Its stock sold

More information

Business Plan Planning Service Financial Analyses and Projections

Business Plan Planning Service Financial Analyses and Projections Business Plan Planning Service Financial Analyses and Projections Financials Included With Every Ceo Resource Plan These are the financial analyses and projections that are included with all plans developed

More information

Financial Statements

Financial Statements Financial Statements The financial information forms the basis of financial planning, analysis & decision making for an organization or an individual. Financial information is needed to predict, compare

More information

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

More information

Reporting and Analyzing Cash Flows QUESTIONS

Reporting and Analyzing Cash Flows QUESTIONS Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users

More information

A Simple Model. Introduction to Financial Statements

A Simple Model. Introduction to Financial Statements Introduction to Financial Statements NOTES TO ACCOMPANY VIDEOS These notes are intended to supplement the videos on ASimpleModel.com. They are not to be used as stand alone study aids, and are not written

More information

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS

CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS C H 2 3, P a g e 1 CH 23 STATEMENT OF CASH FLOWS SELF-STUDY QUESTIONS (note from Dr. N: I have deleted questions for you to omit, but did not renumber the remaining questions) 1. The primary purpose of

More information

APPENDIX 1 The Statement of Financial Position

APPENDIX 1 The Statement of Financial Position APPENDIX 1 The Statement of Financial Position 1. Assets: the resources of the organization which are used to provide service and generate value 2. Current assets: assets which can be converted to cash

More information

LEBANESE ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS MANAGERIAL ACCOUNTING

LEBANESE ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS MANAGERIAL ACCOUNTING LEBANESE ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS MANAGERIAL ACCOUNTING JULY 2015 MULTIPLE CHOICE QUESTIONS (37.5%) Choose the correct answer 1. All of the following statements concerning standard costs

More information

Construction Economics & Finance. Module 6. Lecture-1

Construction Economics & Finance. Module 6. Lecture-1 Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential

More information

Summary of Financial Report for the FY ending March 2015 (Non-Consolidated)

Summary of Financial Report for the FY ending March 2015 (Non-Consolidated) Summary of Financial Report for the FY ending March 2015 (Non-Consolidated) April 30, 2015 Listed Company Name: Japan Tissue Engineering Co., Ltd. Listed Securities Exchange: JQ Stock Code: 7774 URL http://www.jpte.co.jp

More information

Chapter 12 Forecasting and Short- Term Financial Planning

Chapter 12 Forecasting and Short- Term Financial Planning Chapter 12 Forecasting and Short- Term Financial Planning LEARNING OBJECTIVES 1. Understand the sources and uses of cash in building a cash budget. 2. Explain how companies use sales forecasts to predict

More information

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and

More information

Consolidated Financial Results for Fiscal Year 2013 (April 1, 2013 March 31, 2014)

Consolidated Financial Results for Fiscal Year 2013 (April 1, 2013 March 31, 2014) Consolidated Financial Results for Fiscal Year 2013 (April 1, 2013 March 31, 2014) 28/4/2014 Name of registrant: ShinMaywa Industries, Ltd. Stock Exchange Listed: Tokyo Code number: 7224 (URL: http://www.shinmaywa.co.jp

More information

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

More information

FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

More information

Accounting Principles Critical to Success Presented By: C. P. Krishnan. www.cakintl.com

Accounting Principles Critical to Success Presented By: C. P. Krishnan. www.cakintl.com Accounting Principles Critical to Success Presented By: C. P. Krishnan Basic Accounting You Need to Know Assets, Liabilities, Equity, Income, & Expenses Assets Includes what you have and what people owe

More information

Cash Flow Analysis. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Sloan School of Management Massachusetts Institute of Technology

Cash Flow Analysis. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Sloan School of Management Massachusetts Institute of Technology Cash Flow Analysis 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Mar 1/3, 2004 1 About The Exam March 10 th a week from today.

More information

Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

More information

1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is known as a voucher system.

1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is known as a voucher system. Accounting II True/False Indicate whether the sentence or statement is true or false. 1. A set of procedures for controlling cash payments by preparing and approving vouchers before payments are made is

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Chapter 2 Financial Statement and Cash Flow Analysis

Chapter 2 Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

More information

Overview of Business Results for the 2nd Quarter of Fiscal Year Ending March 31, 2012 (2Q FY2011)

Overview of Business Results for the 2nd Quarter of Fiscal Year Ending March 31, 2012 (2Q FY2011) November 8, 2011 Overview of Business Results for the 2nd Quarter of Fiscal Year Ending March 31, 2012 () Name of the company: Iwatani Corporation Share traded: TSE, OSE, and NSE first sections Company

More information

Assuming office supplies are charged to the Office Supplies inventory account when purchased:

Assuming office supplies are charged to the Office Supplies inventory account when purchased: Adjusting Entries Prepaid Expenses Second Bullet Example - Assuming office supplies are charged to the Office Supplies inventory account when purchased: Office supplies expense 7,800 Office supplies 7,800

More information

OPERATING FUND. PRELIMINARY & UNAUDITED FINANCIAL HIGHLIGHTS September 30, 2015 RENDELL L. JONES CHIEF FINANCIAL OFFICER

OPERATING FUND. PRELIMINARY & UNAUDITED FINANCIAL HIGHLIGHTS September 30, 2015 RENDELL L. JONES CHIEF FINANCIAL OFFICER PRELIMINARY & UNAUDITED FINANCIAL HIGHLIGHTS September 30, 2015 RENDELL L. JONES CHIEF FINANCIAL OFFICER MANAGEMENT OVERVIEW September 30, 2015 Balance Sheet Cash and cash equivalents had a month-end balance

More information

Dutchess Community College ACC 204 Managerial Accounting Quiz Prep Chapter 9

Dutchess Community College ACC 204 Managerial Accounting Quiz Prep Chapter 9 Dutchess Community College ACC 204 Managerial Accounting Quiz Prep Chapter 9 Budgetary Planning Peter Rivera March 2011 Disclaimer This Quiz Prep is provided as an outline of the key concepts from the

More information

MBA Finance Part-Time Financial Statement Analysis and Cash Flows

MBA Finance Part-Time Financial Statement Analysis and Cash Flows MBA Finance Part-Time Financial Statement Analysis and Cash Flows Professor Hugues Pirotte Spéder 1 1 Levers of Performance Return on Equity Return on Invested Capital Leverage Profit Margin Asset Turnover

More information

Preparing Agricultural Financial Statements

Preparing Agricultural Financial Statements Preparing Agricultural Financial Statements Thoroughly understanding your business financial performance is critical for success in today s increasingly competitive agricultural environment. Accurate records

More information

Company Financial Plan

Company Financial Plan Financial Modeling Templates http://spreadsheetml.com/finance/companyfinancialplan.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse

More information

Financial Statement and Cash Flow Analysis

Financial Statement and Cash Flow Analysis Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

More information

Instructions for E-PLAN Financial Planning Template

Instructions for E-PLAN Financial Planning Template Instructions for E-PLAN Financial Planning Template The EPLAN template will assist you in preparing financial projections for your existing business. The template uses Microsoft Excel to prepare your projected

More information

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i

Financial Formulas. 5/2000 Chapter 3 Financial Formulas i Financial Formulas 3 Financial Formulas i In this chapter 1 Formulas Used in Financial Calculations 1 Statements of Changes in Financial Position (Total $) 1 Cash Flow ($ millions) 1 Statements of Changes

More information

Mohave Community College Small Business Development Center Financial Statement Spreadsheet Program

Mohave Community College Small Business Development Center Financial Statement Spreadsheet Program Mohave Community College Small Business Development Center Financial Statement Spreadsheet Program Copyright (c) 1998 NPC SBDC Table of Contents 1.0 Overview 2.0 Basic Structure of the program 3.0 Why

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

Financial Statement Analysis: An Introduction

Financial Statement Analysis: An Introduction Financial Statement Analysis: An Introduction 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Scope of Financial Statement Analysis... 3 3. Major

More information

E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

More information

TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

More information

Chapter 21 The Statement of Cash Flows Revisited

Chapter 21 The Statement of Cash Flows Revisited Chapter 21 The Statement of Cash Flows Revisited AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments,

More information

This week its Accounting and Beyond

This week its Accounting and Beyond This week its Accounting and Beyond Monday Morning Session Introduction/Accounting Cycle Afternoon Session Tuesday The Balance Sheet Wednesday The Income Statement The Cash Flow Statement Thursday Tools

More information

Financing Entrepreneurial Ventures Part 1 Financial Plan & Statements

Financing Entrepreneurial Ventures Part 1 Financial Plan & Statements Financing Entrepreneurial Ventures Part 1 Financial Plan & Statements Barbara Peitsch Program Director, Univ. of Michigan Peter Scott Professor of Entrepreneurship/Consultant August 2015 Economic Empowerment

More information

Comprehensive Business Budgeting

Comprehensive Business Budgeting Management Accounting 137 Comprehensive Business Budgeting Goals and Objectives Profit planning, commonly called master budgeting or comprehensive business budgeting, is one of the more important techniques

More information

FINANCIAL SUPPLEMENT December 31, 2015

FINANCIAL SUPPLEMENT December 31, 2015 FINANCIAL SUPPLEMENT December 31, 2015 Monster Worldwide, Inc. (together with its consolidated subsidiaries, the Company, Monster, we, our or us ) provides this supplement to assist investors in evaluating

More information

Consolidated Financial Statements

Consolidated Financial Statements Consolidated Financial Statements For the year ended February 20, 2016 Nitori Holdings Co., Ltd. Consolidated Balance Sheet Nitori Holdings Co., Ltd. and consolidated subsidiaries As at February 20, 2016

More information

EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED)

EMERSON AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED) CONSOLIDATED OPERATING RESULTS (AMOUNTS IN MILLIONS EXCEPT PER SHARE, UNAUDITED) TABLE 1 Quarter Ended March 31, Percent Change Net Sales $ 5,854 $ 5,919 1% Costs and expenses: Cost of sales 3,548 3,583

More information

Statement of Cash Flows. Study Objectives

Statement of Cash Flows. Study Objectives Statement of Cash Flows Study Objectives Indicate the primary purpose of the statement of cash flows. Distinguish among operating, investing, and financing activities. Explain the impact of the product

More information

Definitions of Terms

Definitions of Terms Definitions of Terms Operating and financial measures are utilized by T-Mobile's management to evaluate its operating performance and, in certain cases, its ability to meet liquidity requirements. Although

More information

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs.

Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Objectives: Long-Term Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Premium Mortgages!

More information

Definition of Accounting

Definition of Accounting SOLUTIONS TO EXERCISES Lesson 1: Definition of Accounting 1. What is accounting? What are its main functions? Accounting is the process of financially measuring, recording, summarizing and communicating

More information

Quarterly Financial Results for the Fiscal Year Ending September 30, 2016 (J-GAAP)

Quarterly Financial Results for the Fiscal Year Ending September 30, 2016 (J-GAAP) February 10, 2016 Quarterly Financial Results for the Fiscal Year Ending September 30, 2016 (J-GAAP) (1st Quarter / October 1, 2015 December 31, 2015) Company Name Hosokawa Micron Corporation Stock Exchange

More information

Working Capital Management

Working Capital Management Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets.

More information

Working Capital Management

Working Capital Management Working Capital Management Gitman and Hennessey, Chapter 14 Spring 2004 14.1 Net Working Capital Fundamentals In 2002, current assets accounted for 31.7% of non-financial Canadian corporations total assets.

More information

Chapter Financial Forecasting

Chapter Financial Forecasting Chapter Financial Forecasting PPT 4-2 Chapter 4 - Outline What is Financial Forecasting? 3 Financial Statements for Forecasting Constructing Pro Forma Statements Basis for Sales Projections Steps in a

More information

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS

Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction

More information

GVEP Workshop Finance 101

GVEP Workshop Finance 101 GVEP Workshop Finance 101 Nairobi, January 2013 Agenda Introducing business finance Understanding financial statements Understanding cash flow LUNCH Reading and interpreting financial statements Evaluating

More information

Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

More information

MCQ on Financial Management

MCQ on Financial Management MCQ on Financial Management 1. "Shareholder wealth" in a firm is represented by: a) the number of people employed in the firm. b) the book value of the firm's assets less the book value of its liabilities

More information

Chapter 1 Financial Statement and Cash Flow Analysis

Chapter 1 Financial Statement and Cash Flow Analysis Chapter 1 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

More information

IV. Test Questions and Solutions. Chapter 1. Multiple Choice

IV. Test Questions and Solutions. Chapter 1. Multiple Choice IV. Test Questions and Solutions Chapter 1 Multiple Choice 1. What basic financial statements can be found in a corporate annual report? a. Balance sheet, auditor's report and income statement. b. Balance

More information

EXERCISES. The cash from operating activities detail is provided as follows for class discussion:

EXERCISES. The cash from operating activities detail is provided as follows for class discussion: EXERCISES Ex. 14 1 There were net additions, such as depreciation and amortization of intangible assets of $389 million, to the net loss reported on the income statement to convert the net loss from the

More information

Report Description. Business Counts. Top 10 States (by Business Counts) Page 1 of 16

Report Description. Business Counts. Top 10 States (by Business Counts) Page 1 of 16 5-Year County-Level Financial Profile Industry Report Architectural Services (SIC Code: 8712) in Prince George County, Maryland Sales Range: $500,000 - $999,999 Date: 11/07/08 Report Description This 5-Year

More information

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio =

Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = 1 Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = Cash / CL 98 / 540 =.18 times 2 Computing Leverage

More information

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes

CASH FLOW STATEMENT. MODULE - 6A Analysis of Financial Statements. Cash Flow Statement. Notes MODULE - 6A Cash Flow Statement 30 CASH FLOW STATEMENT In the previous lesson, you have learnt various types of analysis of financial statements and its tools such as comparative statements, common size

More information

SAMPLE MANUFACTURING COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS. Year ended December 31, 2011

SAMPLE MANUFACTURING COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS. Year ended December 31, 2011 SAMPLE MANUFACTURING COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS Year ended SAMPLE MANUFACTURING COMPANY LIMITED CONSOLIDATED FINANCIAL STATEMENTS For the year ended The information contained in

More information

Accounting 500 4A Balance Sheet Page 1

Accounting 500 4A Balance Sheet Page 1 Accounting 500 4A Balance Sheet Page 1 I. PURPOSE A. The Balance Sheet shows the financial position of the company at a specific point in time (a date) 1. This differs from the Income Statement which measures

More information

Statement of Cash Flow

Statement of Cash Flow Management Accounting 337 Statement of Cash Flow Cash is obviously an important asset to all, both individually and in business. A shortage or lack of cash may mean an inability to purchase needed inventory

More information

how to prepare a cash flow statement

how to prepare a cash flow statement business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

More information

Consolidated Financial Results for the nine months of Fiscal Year 2010

Consolidated Financial Results for the nine months of Fiscal Year 2010 Consolidated Financial Results for the nine months of Fiscal Year 2010 (Fiscal Year 2010: Year ending March 31, 2010) Noritake Co., Limited Company Name Stock Exchange Listings Tokyo, Nagoya Code Number

More information

Overview of Business Results for the Second Quarter of Fiscal Year Ending March 2015 [Japanese Standard Form] (Consolidated)

Overview of Business Results for the Second Quarter of Fiscal Year Ending March 2015 [Japanese Standard Form] (Consolidated) Overview of Business Results for the Second Quarter of Fiscal Year Ending March 2015 [Japanese Standard Form] (Consolidated) November 6, 2014 Name of the Company: Cosmo Oil Co., Ltd. Shares traded:tse

More information

Liquidity analysis: Length of cash cycle

Liquidity analysis: Length of cash cycle 2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition

More information

RAPID REVIEW Chapter Content

RAPID REVIEW Chapter Content RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit

More information

BACKGROUND KNOWLEDGE for Teachers and Students

BACKGROUND KNOWLEDGE for Teachers and Students Pathway: Business, Marketing, and Computer Education Lesson: BMM C6 4: Financial Statements and Reports Common Core State Standards for Mathematics: N.Q.2 Domain: Quantities Cluster: Reason quantitatively

More information

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for. A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

More information

Performance Review. Sample Company

Performance Review. Sample Company Performance Review Sample Company For the period ended 12/31/2017 Provided By Page 1 / 18 This report is designed to assist you in your business' development. Below you will find your overall ranking,

More information

The Basic Framework of Budgeting

The Basic Framework of Budgeting Master Budgeting 1 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of

More information

As of December 31, 2014. As of December 31, 2015. Assets Current assets:

As of December 31, 2014. As of December 31, 2015. Assets Current assets: Assets Current assets: Alphabet Inc. CONSOLIDATED BALANCE SHEETS (In millions, except share and par value amounts which are reflected in thousands, and par value per share amounts) As of December 31, 2014

More information

The Statement of Cash Flows

The Statement of Cash Flows CHAPTER The Statement of Cash Flows OBJECTIVES After careful study of this chapter, you will be able to: 1. Define operating, investing, and financing activities. 2. Know the categories of inflows and

More information

CHAE Review. Capital Leases & Forms of Business

CHAE Review. Capital Leases & Forms of Business CHAE Review Financial Statements, Capital Leases & Forms of Business This is a complete review of the two volume text book, Certified Hospitality Accountant Executive Study Guide, as published by The Educational

More information

Business Plan. In completing the following proposal provide as much detailed information as possible.

Business Plan. In completing the following proposal provide as much detailed information as possible. Business Plan A business plan is an integral part of a financing request. It is an introduction to your business, and it provides us with the initial information that we require to start to an application.

More information

Midterm Fall 2012 Solution

Midterm Fall 2012 Solution Midterm Fall 2012 Solution Instructions: 1) Answers for the multiple-choice questions must be recorded on the UW answer card. All other questions must be answered in the space provided on the examination

More information