The Magic of Financial
Statements
Presented by:
Robert E. Mark
Chief Financial Officer
Rowe Incorporated
1
“I’ve worked
myself up from
nothing to a state
of extreme
poverty.”
-Groucho Marx
2
OVERVIEW
Balance Sheet
Profit and Loss (Income) Statement
Statement of Cash Flows
3
4
The Balance Sheet
LIABILITIES
(Amounts owed to outside creditors)
+ EQUITY
(Or net worth)
_________________
= ASSETS
(Resources of the business)
5
6
Liabilities
Assets
7
ABC ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 2001
CURRENT ASSETS
Cash
Accounts Receivable
Work In Process
Prepaid Federal Income Tax
Total Current Assets
PROPERTY AND EQUIPMENT
Vehicles
Furniture, fixtures and equip
Leasehold improvements
Less Accumulated Depreciation
Total Property & Equipment
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Line of Credit
Current Portion of Long Term Debt
Total Current Liabilities
LONG -TERM DEBT
Notes Payable & Cpital Lease,
net of current portion
Total Liabilities
2001
132,341
1,608,934
677,075
1,000
2,419,350
2000
28,456
1,098,234
567,934
0
1,694,624
234,895
2,678,934
567,980
3,481,809
210,368
2,323,456
450,342
2,984,166
878,965
2,602,844
769,543
2,214,623
5,022,194
3,909,247
225,932
543,789
356,781
1,126,502
245,792
323,466
291,364
860,622
868,932
1,995,434
623,654
1,484,276
DEFERRED INCOME TAXES
STOCKHOLDERS' EQUITY
Common stock - par value $100, 1,000
Retained Earnings
Total Stockholders' Equity
684,329
598,724
100,000
2,242,431
2,342,431
100,000
1,726,247
1,826,247
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
5,022,194
3,909,247
8
ABC ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 2001
CURRENT ASSETS
Cash
Accounts Receivable
Work In Process
Prepaid Federal Income Tax
Total Current Assets
PROPERTY AND EQUIPMENT
Vehicles
Furniture, fixtures and equip
Leasehold improvements
132,341
1,608,934
677,075
1,000
2,419,350
234,895
2,678,934
567,980
Less Accumulated Depreciation
3,481,809
878,965
Total Property & Equipment
2,602,844
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Line of Credit
Current Portion of Long Term Debt
Total Current Liabilities
5,022,194
1,126,502
LONG -TERM DEBT
Notes Payable & Cpital Lease, net of current
Total Liabilities
868,932
1,995,434
DEFERRED INCOME TAXES
STOCKHOLDERS' EQUITY
Common stock - par value $100, 1,000 shares
Retained Earnings
Total Stockholders' Equity
TOTAL ASSETS
225,932
543,789
356,781
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
684,329
100,000
2,242,431
2,342,431
5,022,194
9
BASIC MATH 101
1,000
40
1,000
30
1,000
20
1,000
10
--------
4,100
10
The Income Statement
Sales
- Pass thru billing
= Net Sales
- Direct Expenses
= Gross Profit
- Admin & Depreciation Expenses
= Income from Operations
+/- Other Income or Expenses
= Income before Taxes
- Taxes_______________
= Net Income
11
ABC ENGINEERING, INC.
INCOME STATEMENT
DECEMBER 31, 2001
SALES
Gross Sales
Less Pass Thru Billing
NET SALES
2001
9,765,492
-237,854
9,529,639
2000
8,500,306
-321,675
8,180,631
Direct Expenses
GROSS PROFIT
7,675,234
1,854,405
6,678,908
1,501,723
837,513
109,422
907,470
622,345
101,876
777,502
OTHER INCOME (EXPENSE)
Interest Income
Interest Expense
Total Other Expense
12,341
-125,679
-113,338
9,687
-104,679
-94,992
Income Before Federal Tax
794,132
682,510
Federal Income Tax
Net Income
277,946
516,186
238,878
443,632
Administrative Expenses
Depreciation Expense
Income from Operations
12
The Statement of Cash Flows
Cash from operations
+/- Cash provided by or applied to
investing activities
+/- Cash provided by or applied to
financing activities
= Net increase or decrease in cash
13
ABC ENGINEERING, INC.
STATEMENT OF CASH FLOWS
DECEMBER 31, 2001
Cash Provided by Operating Activities
Net Income
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization
Deferred income taxes
(Gain) on sale of property
Changes in operating asets and liabilities
Accounts receivable
Prepaid expenses
Accounts payable
Net cash provided by operating activities
Cash Provided by (Applied to) Financing Activities
Additional long-term debt
Retirement of long-term debt
Proceeds from notes payable
Retirement of notes payable
Issuance of common shares
Purchase of treasury shares
Bonuses paid
Net cash provided by (applied to) financing activities
686,416
323,215
254,678
12,000
-1,326,541
9,854
225,932
185,554
123,465
-251,876
150,000
-24,361
0
0
-256,912
-259,684
Increase (decrease) in cash and cash equivalents
-74,130
Cash and cash equivalents, beginning of year
124,683
Cash and cash equivalents, end of year
50,553
14
DAY
OF
MTH
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
1ST
10 DYS
2ND
10 DYS
3RD
10 DYS
TOTALS
CASH
OPER
APRIL
MAY
1st of
DEPOSITS
MICH
$8,758.00
$23,717.50
$15,274.25
$10,599.25
$10,897.00
$39,864.40
$107,608.50
DRAW
ACCT
$125,000.00
$76,000.00
DEPOSITS
1st of
MICH
DRAW
ACCT
$66,272.07
$294,949.37
$72,638.63
-$200,000.00
$7,134.50
-$58,000.00
$20,000.00
$21,338.25
$10,212.13
$26,419.94
$28,550.00
$40,149.00
$15,000.00
$37,588.20
$4,234.48
$26,193.75
$37,627.85
$32,166.56
$32,000.00
$188,499.51
$248,393.55
$39,726.50
$20,303.25
$12,256.78
$123,490.84
$7,400.00
$62,877.12
$83,442.91
$217,134.65
-$68,000.00
$77,186.60
$19,787.72
$41,797.99
$93,674.08
$109,400.01
$104,978.66
$7,809.25
$31,022.50
$51,836.77
$15,613.55
-$110,000.00
$216,718.90
$0.00
$221,000.00
$478,582.77
$0.00
-$258,000.00
$257,560.16
$0.00
$47,000.00
$597,145.45
$0.00
-$68,000.00
$574,715.41
$0.00
$0.00
$354,103.18
$0.00
-$110,000.00
$1,048,994.47
$0.00
$268,000.00
$1,429,831.40
$0.00
-$436,000.00
15
$1,316,994.47
$993,831.40
FINANCIAL RATIOS
Bank most interested in

Come from the Balance Sheet
Owners most interested in

Come from the Income Statement
16
CURRENT RATIO
Test of short term solvency
17
ABC ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 2001
CURRENT ASSETS
Cash
Accounts Receivable
Work In Process
Prepaid Federal Income Tax
Total Current Assets
PROPERTY AND EQUIPMENT
Vehicles
Furniture, fixtures and equip
Leasehold improvements
Less Accumulated Depreciation
Total Property & Equipment
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Line of Credit
Current Portion of Long Term Debt
Total Current Liabilities
LONG -TERM DEBT
Notes Payable & Cpital Lease,
net of current portion
Total Liabilities
2001
132,341
1,608,934
677,075
1,000
2,419,350 1
234,895
2,678,934
567,980
3,481,809
CURRENT RATIO
Current Assets
Current Liabilities
1
2
2,419,350 / 1,126,502 = 2.15
878,965
2,602,844
5,022,194
225,932
543,789
356,781
1,126,502 2
868,932
1,995,434
DEFERRED INCOME TAXES
STOCKHOLDERS' EQUITY
Common stock - par value $100, 1,000
Retained Earnings
Total Stockholders' Equity
684,329
100,000
2,242,431
2,342,431
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
5,022,194
18
RULE OF THUMB
Current Ratio should be 2.0 : 1 or greater
PSMJ 2001 Median: 1.92
19
THE ACID TEST RATIO
Quick Ratio
20
ABC ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 2001
CURRENT ASSETS
Cash
Accounts Receivable
2001
132,341
1,608,934
3
4
CURRENT RATIO
Work In Process
Prepaid Federal Income Tax
Total Current Assets
PROPERTY AND EQUIPMENT
Vehicles
Furniture, fixtures and equip
Leasehold improvements
677,075
1,000
2,419,350
1
Current Assets
Current Liabilities
Less Accumulated Depreciation
Total Property & Equipment
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Line of Credit
Current Portion of Long Term Debt
Total Current Liabilities
LONG -TERM DEBT
Notes Payable & Cpital Lease,
net of current portion
Total Liabilities
1
2
234,895
2,678,934
567,980
2,419,350 / 1,126,502 = 2.15
3,481,809
ACID TEST RATIO
878,965
2,602,844
Cash + Accts Rec
Current Liabilities
5,022,194
(132,341 + 1,608,934) / 1,126,502 = 1.56
225,932
543,789
356,781
1,126,502
3+4
2
2
868,932
1,995,434
DEFERRED INCOME TAXES
STOCKHOLDERS' EQUITY
Common stock - par value $100, 1,000
Retained Earnings
Total Stockholders' Equity
684,329
100,000
2,242,431
2,342,431
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
5,022,194
21
RULE OF THUMB
Acid Test Ratio should be 1.0 : 1 or greater
PSMJ does not calculate this ratio
22
DEBT TO EQUITY RATIO
Total liabilities
Stockholder Equity
23
ABC ENGINEERING, INC.
BALANCE SHEET
DECEMBER 31, 2002
CURRENT ASSETS
Cash
Accounts Receivable
2001
132,341 3
1,608,934 4
Work In Process
CURRENT RATIO
677,075
Prepaid Federal Income Tax
Total Current Assets
1,000
2,419,350 1
Current Assets
1
Current Liabilities
2
PROPERTY AND EQUIPMENT
Vehicles
234,895
Furniture, fixtures and equip
Leasehold improvements
2,419,350 / 1,126,502 = 2.15
2,678,934
567,980
3,481,809
ACID TEST RATIO
Less Accumulated Depreciation
878,965
Total Property & Equipment
2,602,844
Current Liabilities
5,022,194
(132,341 + 1,608,934) / 1,126,502 = 1.56
TOTAL ASSETS
Cash + Accts Rec
3+4
2
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Line of Credit
Current Portion of Long Term Debt
Total Current Liabilities
LONG -TERM DEBT
Notes Payable & Cpital Lease,
net of current portion
Total Liabilities
DEBT TO EQUITY RATIO
225,932
543,789
356,781
1,126,502 2
Total Debt
Stockholder Equity
5
6
1,995,434 / 2,342,431 = .85
868,932
1,995,434 5
DEFERRED INCOME TAXES
STOCKHOLDERS' EQUITY
Common stock - par value $100, 1,000
Retained Earnings
Total Stockholders' Equity
684,329
100,000
2,242,431
2,342,431 6
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
5,022,194
24
RULE OF THUMB
Debt to Equity Ratio should be less than 1.0
PSMJ 2001 Median: 107.21%
25
QUICK REVIEW
SAFETY & LIQUIDITY
Balance Sheet
Current Ratio – 2 : 1 or greater
Acid Test Ratio – 1 : 1 or greater
Debt to Equity Ratio – less than 1
26
RETURN ON SALES RATIO
Net Income Before Taxes
Net Sales Revenue
PSMJ does not calculate this ratio
27
DECEMBER 31, 2001
SALES
Gross Sales
Less Pass Thru Billing
NET SALES
2001
9,765,492
-237,854
9,529,639 1
Return on Sales
Direct Expenses
GROSS PROFIT
Administrative Expenses
Depreciation Expense
Income from Operations
OTHER INCOME (EXPENSE)
Interest Income
Interest Expense
Total Other Expense
7,675,234
1,854,405
837,513
109,422
907,470
Income Before Taxes 2
Net Sales 1
794,132 / 9,529,639 = 0.083
12,341
-125,679
-113,338
Income Before Federal Tax
794,132 2
Federal Income Tax
Net Income
277,946
516,186
28
RETURN ON EQUITY
Return on Investment
PSMJ 2001 Median: 16.51%
29
RETURN ON EQUITY
Net Income (Income Statement)
Stockholders’ Equity (Balance Sheet)
30
RETURN ON EQUITY
$794,132
= 33.9%
$2,342,431
31
RETURN ON ASSETS RATIO
Net Income (Income Statement)
Total Assets (Balance Sheet)
PSMJ 2001 Median: 6.46%
32
RETURN ON ASSETS RATIO
$794,132
= 15.8%
$5,022,194
33
AVERAGE COLLECTION DAYS
Avg Accounts Receivable (Bal Sht)
Avg Daily Sales (Income Statement)
PSMJ 2001 Median: 66.64 days
34
AVG ACCOUNTS RECEIVABLE
Prior yr Accts Rec + Current yr Accts Rec
2
35
AVERAGE DAILY SALES
Annual Gross Sales
365
36
AVERAGE COLLECTION DAYS
(1,608,934 + 1,098,234) / 2
9,765,492 / 365
= 50.6 DYS
PSMJ 2001 Median: 66.64 days
37
ZETA FACTOR
1. Working Capital (Current
Assets – Current Liabilities) /
Total Assets
___ X 1.2 = ___
2. Retained Earnings /
Total Assets
___ X 1.4 = ___
3. Net Income before Tax
& Interest / Total Assets ___ X 3.3 = ___
4. Owner’s Equity / Total Debt ___ X 0.6 = ___
5. Sales / Total Assets
___ X 1.0 = ___
Total
____
38
ZETA FACTOR
1. Working Capital (Current
Assets – Current Liabilities) /
Total Assets
0.26 X 1.2 = 0.31
2. Retained Earnings /
Total Assets
0.45 X 1.4 = 0.62
3. Net Income before Tax
& Interest / Total Assets 0.18 X 3.3 = 0.60
4. Owner’s Equity / Total Debt 0.75 X 0.6 = 0.45
5. Sales / Total Assets
1.94 X 1.0 = 1.94
Total
3.92
39
40
41