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SRT510 Business Case Studies
Financial Statements: Introduction to the Balance Sheet
Financial Statements
The Big Three: Balance Sheet
Snapshot of what company owns & owes Income Statement
Net Income (= revenue – expenses) Cash Flow Statement
Where cash comes from and where it goesNB: We are not going to discuss this in any
detail
Financial Statements
Why do we care? Understand financial “health”
Diagnose illsPrescribe useful remediesAnticipate financial consequencesMeasure Investment (in IT) ToleranceAvoid severe illness & “death”
Some Definitions
Fixed Assets:Long-term tangible material goods that a
business owns and uses in the production of its income.
Fixed assets are not expected to be consumed or converted into cash for at least a year.
Examples: buildings, real estate, equipment, furniture
Some Definitions
Accounts Receivable (A/R):“If a company has receivables, this means it has made a sale but has yet to collect the money from the purchaser. Most companies operate by allowing some portion of their sales to be on credit.
These type of sales are usually made to frequent or special customers who are invoiced periodically, and allows them to avoid the hassle of physically making payments as each transaction occurs. In other words, this is when a customer gives a company an IOU for goods or services already received or rendered.”
(http://investopedia.com/terms/a/accountsreceivable.asp)
Examples?
Some Definitions
Accounts Payable (A/P):“Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company.”
(http://www.investorwords.com/51/accounts_payable.html)
Examples?
Foundation Of All Accounting
Assets = Liabilities + Shareholder’s Equity (SE)
SE = Assets – Liabilities
SE = “what you own” – “what you owe”
SE = “value of the shareholders’ investment in the company”
Foundation Of All Accounting
SIMPLE EXAMPLE: In 2009: You buy a $260,000 car (
2006 Ferrari F430 Spider F1) . You put $60K down and take a car loan for $200K
You have $260K in assets, $200K in liabilities and $60K in SE
If you pay off $50K in one year, and your car increases in value (that model is in demand) to $300K then you have $300K in assets, $150K in liabilities and $150K in SE
Foundation Of All Accounting
SAME EXAMPLE, a bit more complex: You can’t afford the car on your own so you buy it with a
(wealthy) aunt. You decide on a 60/40 split. In 2009: You & your aunt buy the $260,000 car, putting
$160K down--$156K (60% of $260K) from your aunt, $4k from you. You also take a car loan for $100K
Together, you have $260K in assets, $100K in liabilities and $160K in SE
Individually: your aunt has $156K in assets, $0 in liabilities, and $156K in SE you have $104K in assets, $100K in liabilities and $4K in SE
Cash Flow-Production Cycle
Cash
A/RFixed
Assets
Inventory
Production ($ are used to create inventory—raw materials, salaries, etc.)
Investment ($ used to purchase fixed assets)
Depreciation (fixed assets are used up as inventory is created)
Taxes, dividendsPayments towards liabilities(loans, A/P)
Cash Flow-Production Cycle
Cash
A/RFixed
Assets
Inventory
cash sales
credit sales (sales in which $ are not paid right away; e.g. perhaps within 30 days. Note: this typically does NOT include 3rd party credit card (e.g. VISA) sales.)
Collection (customers who bought on credit, pay what they owe)
Money Borrowed (Loans)
Cash Flow-Production Cycle
Cash
A/RFixed
Assets
Inventory
Production cash sales
Investment
Depreciation credit sales
Collection
Taxes, dividends, liability paymentsLoans
Assets Or Liabilities?
Asset Liability
Cash
Fixed Asset
Inventory
A/R
A/P
Loan
TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)
Analysis for Financial management, Higgins, 8e
TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)
Analysis for Financial management, Higgins, 8e
TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)
Analysis for Financial management, Higgins, 8e
TABLE 1-2 Harley-Davidson, Inc. Balance Sheets ($ millions)TABLE 1-2 Harley-Davidson, Inc. Balance Sheets ($ millions)
Change in
2003 2004 Account
AssetsCash 329.3$ 275.2$ (54.1)$ Marketable securities 993.3 1,336.9 343.6 Accounts receivable, less reserve for possible losses 1,114.4 1,328.4 214.0 Inventories 207.7 226.9 19.2 Prepaid income taxes 51.2 60.5 9.3 Other current assets 33.2 38.3 5.1
Total current assets 2,729.1 3,266.2
Property, plant, and equipment 2,191.2 2,193.4 2.2 Less accumulated depreciation and amortization 1,144.9 1,168.7 23.8
Net property, plant, and equipment 1,046.3 1,024.7 (21.6)
Finance receivables, net 735.9 905.2 169.3
Goodwill 53.7 59.5 5.8 Other assets 358.1 227.7 (130.4)
Total assets 4,923.1$ 5,483.3$
December 31
Analysis for Financial management, Higgins, 8e
TABLE 1-2 (Continued)TABLE 1-2 (Continued)
Liabilities and Shareholders' EquityLong-term debt due in one year 324.3$ 495.4$ 171.1 Accounts payable 223.9 244.2 20.3 Income taxes payable 54.8 53.5 (1.3) Accrued expenses 197.2 197.1 (0.1) Other current liabilities 155.6 182.4 26.8
Total current liabilities 955.8 1,172.6
Long-term debt 670.0 800.0 130.0
Postretirement healthcare benefits 127.4 149.8 22.4 Deferred income taxes 125.8 51.4 (74.4) Other long-term liabilities 86.3 90.8 4.5
Total liabilities 1,965.3 2,264.6
Common stock 3.3 3.3 Additional paid-in capital 419.5 533.1 Retained earnings 3,121.2 3,832.5 Less treasury stock (586.2) (1,150.4)
Total shareholders' equity 2,957.8 3,218.5 260.7
Total liabilities and shareholders' equity 4,923.1$ 5,483.1$
Analysis for Financial management, Higgins, 8e