Financial Statements

 Snapshot of what company owns & owes

 Net Income (= revenue – expenses)

 Where cash comes from and where it goes
 NB: We are not going to discuss this in any detail

Financial Statements

 Diagnose ills
 Prescribe useful remedies
 Anticipate financial consequences
 Measure Investment (in IT) Tolerance
 Avoid severe illness & “death”

Some Definitions

 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

“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)


Some Definitions

“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
)


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
Payments towards liabilities
(loans, A/P)
Taxes, dividends
Cash
Investment
($ used to purchase fixed assets)
Fixed
Assets
Production
($ are used to create inventory —raw materials, salaries, etc.)
A/R
Depreciation
(fixed assets are used up as inventory is created)
Inventory

Cash Flow-Production Cycle
Money Borrowed
(Loans)
Cash
Fixed
Assets
Collection
(customers who bought on credit, pay what they owe) cash sales
A/R
Inventory credit sales
(sales in which $ are not paid right away; e.g. perhaps within 30 days.
Note: this typically does NOT include 3 rd party credit card (e.g. VISA) sales.)

Cash Flow-Production Cycle
Loans
Taxes, dividends, liability payments
Cash
Investment
Production
Fixed
Assets
Collection cash sales
A/R
Depreciation credit sales
Inventory

Assets Or Liabilities?
Asset Liability
Cash
Fixed Asset
Inventory
A/R
A/P
Loan

TABLE 1-1 Worldwide Sports Financial
Transactions 2005
($ thousands)
+ EQUITY
$ 250
(140)
875
(190)
(360)
(210)
25
80
30
60
(15)
(10)
$ 215 $ 25 $ 110 $ 45
20
$ 100
$ 20 $ 100
$ 150
900
(190)
(350)
(210)
(15)
(10)
$ 275
Analysis for Financial management, Higgins, 8e

TABLE 1-1 Worldwide Sports Financial
Transactions 2005
($ thousands)
Beginning Balance 1/1/05
Initial purchases
Sales
Wages
Merchandise purchases
Other expenses
Depreciation
Interest payment
Ending Balance 12/31/05
ASSETS
Cash
Accounts receivable Inventory
Fixed assets
$ 250
(140)
875
(190)
(360)
(210)
25
80
30
60
(15)
(10)
$ 215 $ 25 $ 110 $ 45
LIABILITIES
Loan
Accounts payable from relatives
+ EQUITY
Owners' equity
$ 100 $ 150
$
20
20 $ 100
900
(190)
(350)
(210)
(15)
(10)
$ 275
Analysis for Financial management, Higgins, 8e

TABLE 1-1 Worldwide Sports Financial
Transactions 2005
($ thousands)
=
=
+
+ EQUITY
$ 250
(140)
875
(190)
(360)
(210)
25
80
30
60
(15)
(10)
$ 215 $ 25 $ 110 $ 45
20
$ 20
$ 100
$ 100
$ 150
900
(190)
(350)
(210)
(15)
(10)
$ 275
Analysis for Financial management, Higgins, 8e

TABLE 1-2 Harley-Davidson, Inc. Balance Sheets
($ millions)
December 31 Change in
2003 2004 Account
Assets
Cash $ 329.3
Marketable securities 993.3
Accounts receivable, less reserve for possible losses 1,114.4
Inventories
Prepaid income taxes
Other current assets
207.7
51.2
33.2
Total current assets 2,729.1
Property, plant, and equipment
Less accumulated depreciation and amortization
Net property, plant, and equipment
Finance receivables, net
Goodwill
Other assets
Total assets
2,191.2
1,144.9
1,046.3
735.9
53.7
358.1
$ 4,923.1
$ 275.2
1,336.9
1,328.4
226.9
60.5
38.3
3,266.2
2,193.4
1,168.7
1,024.7
905.2
59.5
227.7
$ 5,483.3
$ (54.1)
343.6
214.0
19.2
9.3
5.1
2.2
23.8
(21.6)
169.3
5.8
(130.4)
Analysis for Financial management, Higgins, 8e

TABLE 1-2
(Continued)
Liabilities and Shareholders' Equity
Long-term debt due in one year
Accounts payable
Income taxes payable
Accrued expenses
Other current liabilities
Total current liabilities
Long-term debt
Postretirement healthcare benefits
Deferred income taxes
Other long-term liabilities
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Less treasury stock
Total shareholders' equity
Total liabilities and shareholders' equity
$ 324.3
223.9
54.8
197.2
155.6
955.8
$ 495.4
244.2
53.5
197.1
182.4
1,172.6
171.1
20.3
(1.3)
(0.1)
26.8
670.0
800.0
130.0
127.4
125.8
86.3
1,965.3
149.8
51.4
90.8
2,264.6
3.3
419.5
3,121.2
(586.2)
3.3
533.1
3,832.5
(1,150.4)
22.4
(74.4)
4.5
2,957.8
3,218.5
260.7
$ 4,923.1
$ 5,483.1
Analysis for Financial management, Higgins, 8e