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Bill McMican [email protected]
Cambridge CollegeCambridge CollegeMaster of ManagementMaster of Management
AgendaAgenda EssentialsEssentials
3 Primary Financial Reports3 Primary Financial Reports 9 Key Concepts9 Key Concepts DepreciationDepreciation Cash Flow StatementCash Flow Statement Key RatiosKey Ratios
Financial Case StudiesFinancial Case Studies
Financial ReportsFinancial Reports
Balance SheetBalance Sheet Assets = Liabilities + Owners EquityAssets = Liabilities + Owners Equity Point in Time - Status of the CompanyPoint in Time - Status of the Company
Income Statement (Profit Loss)Income Statement (Profit Loss) Revenue – Expenses = Net ProfitRevenue – Expenses = Net Profit Period of TimePeriod of Time
Cash FlowCash Flow Shows only changes in CashShows only changes in Cash Solvency of the CompanySolvency of the Company
Financial ReportsFinancial ReportsBalance SheetsBalance Sheets
Assets Current
Cash Receivables Inventory Pre-paid Items
Non Current Equipment Buildings Land Good Will
Liabilities Current
Payables Payroll Payable Taxes Payable
Non Current Notes > 1 yr Bonds > 1 yr
Owners Equity Stock Sold at Par Other Paid in Capital Retained Earnings
=
Financial ReportsFinancial ReportsIncome statementsIncome statements
Revenue Sales Interest Other
Expenses Cost of Goods Payroll Travel Tax Depreciation Training Etc. Etc.
Net Income after Tax
- Less Dividends = Retained
Earnings
=
-
Debits and CreditsDebits and Credits
Revenue
Expenses
Assets Liabilities
Owners Equity
Debit Balances
Credit Balances
9 Basic Precepts9 Basic Precepts
MatchingExpenses & Revenue:
Same time
RealizationRevenue when Goods
Delivered
MaterialityDisregard insignificant
matters
ConservatismRevenue: when certain. Expenses: when likely
Asset Measurement
Only facts in money amounts
Going ConcernBusiness: Continuing
Operation
EntityLegal Entity only: not the
people
Money Measurement
Only facts in money amounts
Dual Aspect Always in balance
A=L+OE
DepreciationDepreciation Expense (Yr1) Depreciation Exp
$10,000
Assets (at end of Yr 1) Non-Current
Equipment TRUCK
$50,000 Accumulate Depr. -
$10,000 Book Value
$40,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
YR0 YR1 YR2 |YR3 YR4 YR5
Book Value
Depr Exp
DepreciationDepreciation
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
YR0 YR1 YR2 |YR3 YR4 YR5
Assets recorded at cost
Straight Line or Accelerated
Land has unlimited life – rarely deprecated
Depreciation Expense is an Estimate
Book Value = Cost – Accumulated Depreciation
Book Value does not equal assets “REAL” worth
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
YR0 YR1 YR2 |YR3 YR4 YR5
Straight Line Accelerated
Statement of Cash FlowsStatement of Cash FlowsCASH
Beginning Balance 1/1/06 130,000 Cash Sales 70,000 Accounts Receivable Payments 10,000 Payment for New Assets
50,000 Payroll
45,000 Rent Paid 5,000 Interest Received 1,000 Bonds sold for cash 50,000 Paid Accounts Payable
60,000 Ending Balance 2/1/06 101,000
NET CASH FLOW = - $29,000
Key Ratios and MetricsKey Ratios and Metrics
Profitability• Profit Margin % = Net Income / Sales Revenue = PM%
• Gross Margin % = (Sales - Cost of Sales) / Sales = GM%
Capital Utilization• Days Receivables = Acc Receivables / Sales / 365 days = days
• Inventory Turnover = Cost of Sales / Inventory = turns
• Current Ratio = Current Assets / Current Liabilities
• Quick Ratio = Working Capital / Current Liabilities
• Debt Ratio = Non Current Liabilities / (Non-Current Liabilities + Equity)
• Return on Equity = Net Income / Equity
Metrics• Working Capital = Current Assets – Current Liabilities
• Permanent Capital = Working Capital + Non-Current Assets
