Transcript Slide 1

Economics /Management 4
Financial Accounting
Financial Reporting
Background
Financial Analysis and Financial Profiling
Trends and patterns.
Comparisons and ratios.
What lies beneath.
Only cash is cash, and it has its costs.
The Accrual
Concept
Accrual Accounting
Reports the economic substance of transactions –
the exchange of legal claims and obligations -regardless of whether or not cash was also
exchanged.
To convey financial performance as an evolving
measure of success, not a measure of solvency.
The Accrual Concept
It’s about
Choices
It’s
Adversarial
Accrual
Accounting
It’s a Stylized Lie
And, it’s G.A.A.P.
The Accrual Concept
The Accounting Choices
Recognition of Revenues &
Expenses
Capitalization of Costs
Amortization of Capitalized Costs
Reservation for Contingencies
The Accrual
Concept
Costs, Revenues, & Expenses
Which ones -- what’s “in” what’s “out” ?
How much – monetary versus non-monetary
When – this quarter, next, never?
Where – operating, non-recurring, extraordinary?
G.A.A.P.
Generally Accepted Accounting
Principles
G.A.A.P. establishes recognition criteria
but leaves final determination to
managers.
This discretion gives managers the
opportunity to manipulate how financial
performance is reported.
There are gaps in GAAP.
Sales
Perform
the Service ?
Customer
know the Price ?
Revenue
Recognition
A Legal Claim for
the Sale Amount ?
Is the
Amount
Collectable
?
Expenses
Operating ?
Recurring
?
Expense
Recognition
All ?
Match a Revenue ?
Profitability
The many flavors
of Profits
Gross Profit
Reported
Earnings
Operating Earnings
Earnings from
Continuing Activities
Net Income
Profitability
Profits Cost Money
Earnings are a Score Card not a Bank
Statement.
Earnings require Assets plus the extension
of credit.
Creditors and Investors often get more
attention than Customers.
Working Capital
Net Working
Capital
Accounts
Receivable
Inventory
Pre Paid
Expenses
Less
Trade Payables
Accrued
Expenses
Working
Capital
What to look for …
Sales growth should pace receivables growth.
Inventory. The money trap.
Prepaid Expenses. Why?
Payables & Accruals. Only short-term source
of cash.
Cash
Not all Cash Flows
are created equal.
Cash
Flow
To
From
Current Operations
and/or
Working Capital
Purchases
and/or
Sales of Assets
Debt financing
and/or
New Equity
Cash Flow
The Cash Flow Statement
Operating Activities
Investing Activities
Financing Activities
Changes in the Balance Sheet
between any two periods.
Statement of Operations
2,000
2,001
$ 1,111,240
261,207
1,372,447
$ 1,389,050
248,147
1,637,197
Revenue
Licensing
Service
Total
Cost of Revenue
Licensing
Service
Total
Gross Profit
Salaries & Benefits
Marketing & Promotion
Office
Leases
Operating Expenses
Operating Income (Loss)
Interest (Income) Expense
Amortization of Goodwill
Other (Income) Expense
Minority Interest
Income After Taxes
224,805 $ 247,286
48,551
53,406
273,356
300,692
1,099,091
1,336,505
$
603,255 $ 754,069
161,405
209,827
137,880
151,668
90,500
95,025
993,040
1,210,588
106,051
125,917
45,264
74,686
(4,439)
(22,195)
$
65,226 $
73,426
A
125%
95%
A
110%
110%
19.29%
10.00%
21.60%
B
B
125%
130%
110%
105%
C
165%
D
500%
21.91%
18.73%
12.57%
An Illustration
Trends, Ratios, and Cash Flow:
Sales &
AR
Growth
EBIT &
Interest
+
CPLTD
EBIT &
CF Ops
19.3%
9.8%
$126K
$126K
31.2%
12.4%
$ 75K
($71K)
Change
in Cash
Cycle
(days)
Change in
Cost Debt
11 days
41 days
Balance Sheet
2000
2001
Cash
Accounts Receivable
Other Current Assets
Current Assets
Property and Equipment, net
Intangible Assets
Investment in Affiliates
Other Long Term Assets
Total Long Term Assets
$
240,425
405,537
12,022
657,984
289,208
303,689
592,897
$
Total Assets
Accounts Payable
Accrued Liabilities
Notes Payable - Current
Loans, Related Parties - Current
Current Liabilities
Capital Leases - Less Current
Long Term Liabilities
Long Term Liabilities
Total Liabilities
Share Capital
Special Warrants
Retained Earnings (Deficit)
Total Equity
$ 1,250,881
$
142,000
162,907
70,800
$
$
375,707
320,000
460,000
780,000
1,155,707
211,698
(116,524)
95,174
240,425
531,921
15,605
787,951
250,605
346,521
597,126
1,385,077
138,500
171,052
52,000
361,552
260,000
600,000
860,000
1,221,552
211,698
(21,499)
190,199
(126,384)
(3,583)
31.2%
38,603
0
0
(42,832)
(3,500)
8,145
(18,800)
-2.5%
5.0%
-26.6%
(14,155)
(60,000)
140,000
10.3%
0
0
95,025
Discussion
What do we know?
This firm is struggling with growth and …
• Sales Growth
strong
• Receivables absorbed
it
• EBIT covers
Interest
• Not corroborated by
Operating Cash Flow
• Days Cash
slipped from 11 to
41 days
• Net working capital
increased.
• Up from < 10% to >
12%
Sales
CA
2000
1,372,447
2001
1,637,197
417,559
0.30
110
547,526
0.33
120
(11)
CL
$
99
0.27
375,707 $
Days
(41)
80 Days
0.22
361,552
Discussion
Overall
What are the Trends?
Is Cash
coming from
Operations?
What is the Company’s
cost of Debt Capital?
Are all Fixed
Charges
disclosed?
Questions and Answers
Expenses:
Outflows of cash – costs - or uses of
assets or new obligations
• Cash paid when?
1. in Advance – service paid-for but not-yet used.
Booked as a pre-paid Expense
2. at time of Use – paid-for and consumed
3. the Next accounting period – consumed but
not paid-for. Booked as accrued Expense
*
Revenue is earned when products are “delivered”.
Expenses:
Costs related to primary activities
• Three categories*:
1. Direct – outflows matched to the product
2. Indirect – outflows not proportional to the product
3. Periodic – related to the accounting period
* Many types - look at the Chart of Accounts in the Reader.
Types of Expenses
Income Statement
Single Step
For the 3 months ending September 30, 2013
Revenue
18,000
Expenses
(13,900)
77.2%
4,100
22.8%
Profit
Income Statement
Four-step
For the 3 months ending September 30, 2013
Revenue
18,000
COGS
( 6,000)
Gross Profit
12,000
Operating expenses ( 7,600)
Operating Earnings
Interest
Pre-tax Income
Tax expense
Net Earnings
(13,900)
4,400
(
300)
4,100
0
4,100
22.8%
Income Statement
Multi-step
For the 3 months ending June 30, 2013
Revenue
18,000
COGS
(6,000)
Gross Profit
12,000
SG&A
(6,600)
EBITDA
5,400
Margins
66.7%
30.0%
Depreciation (1,000)
EBIT
Interest
EBT
Taxes
Net Income
4,400
24.4%
(300)
4,100
0
4,100
22.8%
Balance Sheet
Cash
CURRENT
ASSETS
CURRENT
LIABILITIES
FIXED, LONGLIVED ASSETS
NON-CURRENT
LIABILITIES
EQUITY
Balance Sheet
Cash
WORKINGCAPITAL ASSETS
OTHER CURRENT
ASSETS
Long-lived Assets
Accumulated
Depreciation
WORKING -CAPITAL
LIABILITIES
CURRENT
OTHER CURRENT
LIABILITIES
IBD - Bonds and Loans
OTHER NONCURRENT LIABILITIES
Paid in Capital
Retained earnings
NONCURRENT
Balance Sheet
Cash
The 4 sources of
capital
Receivables
Customer Advances
Inventory
Payables
Supplies
Accrued expenses
Pre Paid Expenses
Long-lived Assets
Accum.
Depreciation
Other CL
Bonds, Loans
Paid in Capital
Retained earnings
Trade
Credit
Interestbearing
Debt
Capital
Stock
Earnings
The Balance Sheet Equation
A = L + Eq
Debt and Equity
Financial Capital
Monetary –
cash,
receivables
Non-monetary – fixed assets
The Components of Equity
A = L +
Eq
+ P-in-K
+ RE0
RE1
+(Rev1 – Ex1)
Retained Earnings
Beginning RE
+(Rev1 – Ex1) = Current Profits
- Distributions, i.e. Dividends
= Ending RE