Lecture Series #1
Budget Planning, Implementation and Monitoring
First Step: Understanding Financial Statements – Corporate Approach
Chris Droussiotis
September 2011
Table of Contents



Accounting Definitions, Terms and Concepts
Using Financial Statements
Financial Ratio Analysis
These slides could be obtain via the Instructor’s Web page at
www.celeritymoment.com
2
Accounting Definitions and Concepts
A = L + NW
Own
Owe
A = Assets
L = Liabilities
NW = Net Worth
Keep (Value Creation)
Government
How did you pay for the Assets that you own
Similar Concepts in Other Areas of Finance:
• Consumer finance: Value of the House = Mortgage + Equity
• Corporation Value: Enterprise Value = Net Debt + Equity
3
• Investments: Value of the Investment: Margin Loan + Equity
• Deficit or Surplus
Accounting Definitions and Concepts
Book Value Vs Market Value
4
Book Value
Market Value
 Accounting
 Finance
 Fixed Assets
 Financial Assets
 Corporate Taxation
 Investment Taxation
Accounting Definitions and Concepts
Income Vs Cash
The Perfect World:
Every business is run like a lemonade Stand
Income Statement
5
Cash Flow Statement
Lemonade Sales
Sold 100 cups @ $1 each
$ 100.00
Profit
Expenses
Box of 100 Cups
Lemonade concetrate
4 Gallons of Water
Total Expenses
$ 5.00
$ 5.00
$ 10.00
$ 20.00
Net Income (Profit)
$ 80.00
$ 80.00
Plus Money that we owe
Less Money owed to us
$0.00
$0.00
Net Working Capital
$0.00
Cash
$ 80.00
Accounting Definitions and Concepts
Income Vs Cash
Not So Perfect World:
The world of IOUs
Income Statement
6
Cash Flow Statement
Lemonade Sales
Sold 100 cups @ $1 each
$ 100.00
Profit
Expenses
Box of 100 Cups
Lemonade concetrate
4 Gallons of Water
Total Expenses
$ 5.00
$ 5.00
$ 10.00
$ 20.00
Net Income (Profit)
$ 80.00
$ 80.00
Plus Money that we owe
Less Money owed to us
$0.00
-$1.00
Net Working Capital
-$1.00
Cash
$ 79.00
Income Statement



7
Measurement of Profit and Loss over a Period of Time
Top Line to Bottom Line
Revenue (Sales) Less Expenses = Profit or Loss
Income Statement
Income Statement (000's)
8
2009
2010
50
51
52
53
54
55
56
57
58
59
60
Revenues by Geography
U.S.
Europe
Asia
Total Revenue
800,000
120,000
40,000
960,000
920,000
140,000
50,000
1,110,000
Cost of Revenues by Geography
U.S.
Europe
Asia
Total Cost of Revenue
220,000
100,000
25,000
345,000
270,000
115,000
35,000
420,000
62
63
64
65
66
67
68
69
70
Gross Profit
615,000
690,000
Operating Expenses
Administrative & General
Marketing Expenses
Other Operating Expenses
Total Operating Expenses
145,000
75,000
10,000
230,000
165,000
80,000
12,000
257,000
EBITDA
385,000
433,000
72
Depreciation & Amortization
60,000
65,000
74
EBIT
325,000
368,000
76
Interest Expense
130,000
120,000
78
EBT
195,000
248,000
80
81
82
Taxes
78,000
99,200
117,000
148,800
Net Income
40%
Balance Sheet Statement


9
It shows us on a snap shot the Wealth of the Company
The statement is set-up in Order of Liquidity
Balance Sheet Statement
Balance Sheet (000's)
10
6
7
8
9
10
11
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
13
14
15
16
17
18
19
Property and Equipment
Land
Building
Furniture & Equipment
Total Gross P&E
Less Accumulated Depreciaition
Net P&E
21
Long-Term Investments
23
Total Assets
25
Liabilities and Owners Equity
27
28
29
30
31
32
Current Liabilities
Accounts Payable
Accrued Income Taxes
Accrued Expenses
Current Portion of Long Term Debt
Total Current Liabilities
34
Long-Term Debt:
36
Deferred Income Taxes
38
40
41
42
43
44
46
2009
45,000
45,000
35,000
10,000
135,000
2,500,000
450,000
50,000
3,000,000
(300,000)
2,700,000
2010
65,800
60,000
40,000
9,000
174,800
2,500,000
550,000
75,000
3,125,000
(365,000)
2,760,000
$ Change
% Change
20,800
15,000
5,000
(1,000)
39,800
46.2%
33.3%
14.3%
-10.0%
29.5%
100,000
25,000
125,000
(65,000)
60,000
0.0%
22.2%
50.0%
4.2%
21.7%
2.2%
200,000
250,000
50,000
25.0%
3,035,000
3,184,800
149,800
4.9%
35,000
12,000
10,000
20,000
77,000
40,000
10,000
8,000
10,000
68,000
5,000
(2,000)
(2,000)
(10,000)
(9,000)
14.3%
-16.7%
-20.0%
-50.0%
-11.7%
1,200,000
1,180,000
(20,000)
-1.7%
12,000
17,000
Total Liabilties
1,289,000
1,265,000
(24,000)
Owners' Equity
Common Stock
Paid-in-Capital
Retained Earnings
Total Owners' Equity
1,000,000
746,000
1,746,000
1,000,000
25,000
894,800
1,919,800
25,000
148,800
173,800
19.9%
10.0%
Total Liabilities & Owner's Equity
3,035,000
3,184,800
149,800
4.9%
5,000
41.7%
-1.9%
0.0%
Cash Flow Statement

It shows the Company’s Cash Inflow and Outflow over a period of time

Differences between Income Statement and Cash Flow Statement




Represents the changes from last Year’s Balance Sheet to this Year’s
Balance Sheet






11
Timing Differences (Working Capital Activities)
Capital Expenses Vs Operating Expenses (Investment Activities)
Financing Expenses not included in the Income Statement (Financing
Activities)
Asset goes Up = Cash Negative
Asset goes down = Cash Positive
Liability goes up = Cash Positive
Liability goes down = Cash Negative
Owner’s Equity goes up = Cash Positive
Owner’s Equity goes down = Cash Negative
Cash Flow Statement
Balance Sheet (000's)
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
Property and Equipment
Land
Building
Furniture & Equipment
Total Gross P&E
Less Accumulated Depreciaition
Net P&E
Long-Term Investments
2009
2010
$ Change
Cash Flow Statement (000's)
45,000
45,000
35,000
10,000
135,000
65,800
60,000
40,000
9,000
174,800
2,500,000
450,000
50,000
3,000,000
(300,000)
2,700,000
2,500,000
550,000
75,000
3,125,000
(365,000)
2,760,000
20,800
15,000
5,000
(1,000)
39,800
100,000
25,000
125,000
(65,000)
60,000
200,000
250,000
50,000
3,035,000
3,184,800
149,800
35,000
12,000
10,000
20,000
77,000
40,000
10,000
8,000
10,000
68,000
5,000
(2,000)
(2,000)
(10,000)
(9,000)
1,200,000
1,180,000
(20,000)
12,000
17,000
Total Liabilties
1,289,000
1,265,000
(24,000)
Owners' Equity
Common Stock
Paid-in-Capital
Retained Earnings
Total Owners' Equity
1,000,000
746,000
1,746,000
1,000,000
25,000
894,800
1,919,800
25,000
148,800
173,800
Total Liabilities & Owner's Equity
3,035,000
3,184,800
149,800
Total Assets
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Accrued Income Taxes
Accrued Expenses
Current Portion of Long Term Debt
Total Current Liabilities
Long-Term Debt:
Deferred Income Taxes
12
Adjusting Income to Cash
5,000
Net Income
Plus Depreciation
Plus Deffered Taxes
Cash Income
2010
148,800
65,000
5,000
218,800
Cash Flow Statement
Balance Sheet (000's)
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
2009
2010
$ Change
45,000
45,000
35,000
10,000
135,000
65,800
60,000
40,000
9,000
174,800
2,500,000
450,000
50,000
3,000,000
(300,000)
2,700,000
2,500,000
550,000
75,000
3,125,000
(365,000)
2,760,000
100,000
25,000
125,000
(65,000)
60,000
200,000
250,000
50,000
3,035,000
3,184,800
149,800
35,000
12,000
10,000
20,000
77,000
40,000
10,000
8,000
10,000
68,000
5,000
(2,000)
(2,000)
(10,000)
(9,000)
1,200,000
1,180,000
(20,000)
12,000
17,000
Total Liabilties
1,289,000
1,265,000
(24,000)
Owners' Equity
Common Stock
Paid-in-Capital
Retained Earnings
Total Owners' Equity
1,000,000
746,000
1,746,000
1,000,000
25,000
894,800
1,919,800
25,000
148,800
173,800
Total Liabilities & Owner's Equity
3,035,000
3,184,800
149,800
Property and Equipment
Land
Building
Furniture & Equipment
Total Gross P&E
Less Accumulated Depreciaition
Net P&E
Long-Term Investments
Total Assets
20,800
15,000
5,000
(1,000)
39,800
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Accrued Income Taxes
Accrued Expenses
Current Portion of Long Term Debt
Total Current Liabilities
Long-Term Debt:
Deferred Income Taxes
13
Working Capital Activities
5,000
Cash Flow Statement (000's)
2010
Net Income
Plus Depreciation
Plus Deffered Taxes
Cash Income
148,800
65,000
5,000
218,800
Working Capital Activities
Change in Accounts Receivable
Change in Inventory
Change in Prepaid Expenses
Change in Accounts Payable
Change in Accrued Income Taxes
Change in Accrued Expenses
Total Change in Working Capital
(15,000)
(5,000)
1,000
5,000
(2,000)
(2,000)
(18,000)
Operating Cash Flow (OCF)
200,800
Cash Flow Statement
Balance Sheet (000's)
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
2009
2010
$ Change
Cash Flow Statement (000's)
45,000
45,000
35,000
10,000
135,000
65,800
60,000
40,000
9,000
174,800
20,800
15,000
5,000
(1,000)
39,800
2,500,000
450,000
50,000
3,000,000
(300,000)
2,700,000
2,500,000
550,000
75,000
3,125,000
(365,000)
2,760,000
100,000
25,000
125,000
(65,000)
60,000
200,000
250,000
50,000
3,035,000
3,184,800
149,800
35,000
12,000
10,000
20,000
77,000
40,000
10,000
8,000
10,000
68,000
5,000
(2,000)
(2,000)
(10,000)
(9,000)
1,200,000
1,180,000
(20,000)
12,000
17,000
Total Liabilties
1,289,000
1,265,000
(24,000)
Owners' Equity
Common Stock
Paid-in-Capital
Retained Earnings
Total Owners' Equity
1,000,000
746,000
1,746,000
1,000,000
25,000
894,800
1,919,800
25,000
148,800
173,800
Total Liabilities & Owner's Equity
3,035,000
3,184,800
149,800
Property and Equipment
Land
Building
Furniture & Equipment
Total Gross P&E
Less Accumulated Depreciaition
Net P&E
Long-Term Investments
Total Assets
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Accrued Income Taxes
Accrued Expenses
Current Portion of Long Term Debt
Total Current Liabilities
Long-Term Debt:
Deferred Income Taxes
14
Investment Activities
5,000
2010
Net Income
Plus Depreciation
Plus Deffered Taxes
Cash Income
148,800
65,000
5,000
218,800
Working Capital Activities
Change in Accounts Receivable
Change in Inventory
Change in Prepaid Expenses
Change in Accounts Payable
Change in Accrued Income Taxes
Change in Accrued Expenses
Total Change in Working Capital
(15,000)
(5,000)
1,000
5,000
(2,000)
(2,000)
(18,000)
Operating Cash Flow (OCF)
200,800
Investment Activities
Capital Expenditures
Investments (Change)
Total Financing Activities
Cash Available for Debt Service (CAFDS)
(125,000)
(50,000)
(175,000)
25,800
Cash Flow Statement
Balance Sheet (000's)
Current Assets
Cash
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
Property and Equipment
Land
Building
Furniture & Equipment
Total Gross P&E
Less Accumulated Depreciaition
Net P&E
Long-Term Investments
Total Assets
2009
2010
$ Change
45,000
45,000
35,000
10,000
135,000
65,800
60,000
40,000
9,000
174,800
20,800
15,000
5,000
(1,000)
39,800
2,500,000
450,000
50,000
3,000,000
(300,000)
2,700,000
2,500,000
550,000
75,000
3,125,000
(365,000)
2,760,000
100,000
25,000
125,000
(65,000)
60,000
200,000
250,000
50,000
3,035,000
3,184,800
149,800
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Accrued Income Taxes
Accrued Expenses
Current Portion of Long Term Debt
Total Current Liabilities
Long-Term Debt:
Deferred Income Taxes
15
Financing Activities
Cash Flow Statement (000's)
Net Income
Plus Depreciation
Plus Deffered Taxes
Cash Income
148,800
65,000
5,000
218,800
Working Capital Activities
Change in Accounts Receivable
Change in Inventory
Change in Prepaid Expenses
Change in Accounts Payable
Change in Accrued Income Taxes
Change in Accrued Expenses
Total Change in Working Capital
(15,000)
(5,000)
1,000
5,000
(2,000)
(2,000)
(18,000)
Operating Cash Flow (OCF)
200,800
35,000
12,000
10,000
20,000
77,000
40,000
10,000
8,000
10,000
68,000
5,000
(2,000)
(2,000)
(10,000)
(9,000)
Investment Activities
Capital Expenditures
Investments (Change)
Total Financing Activities
1,200,000
1,180,000
(20,000)
Cash Available for Debt Service (CAFDS)
12,000
17,000
Total Liabilties
1,289,000
1,265,000
(24,000)
5,000
Owners' Equity
Common Stock
Paid-in-Capital
Retained Earnings
Total Owners' Equity
1,000,000
746,000
1,746,000
1,000,000
25,000
894,800
1,919,800
25,000
148,800
173,800
Total Liabilities & Owner's Equity
3,035,000
3,184,800
149,800
2010
Financing Activities
ST Debt Payments
LT Payments
Equity Contribution
Total Financing Activities
Free Cash Flow
(125,000)
(50,000)
(175,000)
25,800
(10,000)
(20,000)
25,000
(5,000)
20,800
Cash Flow Statement
Cash Flow Statement (000's)
86 Net Income
87 Plus Depreciation
88 Plus Deffered Taxes
89 Cash Income
91 Working Capital Activities
92 Change in Accounts Receivable
93 Change in Inventory
94 Change in Prepaid Expenses
95 Change in Accounts Payable
96 Change in Accrued Income Taxes
97 Change in Accrued Expenses
98 Total Change in Working Capital
99
100 Operating Cash Flow (OCF)
102 Investment Activities
103 Capital Expenditures
104 Investments (Change)
105 Total Financing Activities
106
107 Cash Available for Debt Service (CAFDS)
16
Recap
2010
148,800
65,000
5,000
218,800
(15,000)
(5,000)
1,000
5,000
(2,000)
(2,000)
(18,000)
Balance Sheet (000's)
Retained Earnings
2009
746,000
2010
894,800
$ Change
148,800
Timing Differences
(Working Capital
Activities)
200,800
(125,000)
(50,000)
(175,000)
Investment Activities
25,800
109 Financing Activities
110
ST Debt Payments
111
LT Payments
112
Equity Contribution
113 Total Financing Activities
(10,000)
(20,000)
25,000
(5,000)
115 Free Cash Flow
20,800
117 Beginning Cash
45,000
119 Ending Cash
65,800
Financing Activities
Balance Sheet (000's)
Current Assets
Cash
2009
45,000
2010
65,800
$ Change
20,800
Financial Analysis

Management Discussion and Analysis (MD&A)

Equity & Bond Research – Wall Street Analysts

The Financial Statements could be used by analysts to project the
Company’s performance and valuation

For an effective performance of the Company, you need to ask the three
following questions:
1.
2.
3.
17
How is the Company doing versus Last Year
How is the Company doing versus its competitors / piers/ market
How is the Company doing versus expectations
Financial Ratio Analysis

Trend Analysis
2010
18
Definition
Trend Analysis Ratios
U.S. Revenue Growth
Europe Revenue Growth
Asia Revenue Growth
Total Revenue Growth
15.0%
16.7%
25.0%
15.6%
(Rev 2010/Rev 2009) -1
EBITDA Growth
12.5%
(EBITDA 2010/EBITDA 2009) -1
Financial Ratio Analysis

Liquidity Ratio

How well the Company manages Cash
2010
Liquidity Ratios
Current Ratio
Quick ratio
Accounts Receivable Turnover (ART)
Accounts Receivable Days
19
2.57x
1.85x
21.14x
17.26
Definition
CA/CL
(Cash + A/R) / CL
Revenue/Avg AR
365 / ART
Financial Ratio Analysis

Solvency Ratio

How well the Company manages Debt
2010
Solvency Ratios
LTD / Total Capitalization
EBITDA / Interest (Coverage Ratio)
LTD / EBITDA (Leverage Ratio)
20
38.1%
3.61x
2.73x
Definition
LTD / (LTD + Equity)
EBITDA / Interest
LTD / EBITDA
Financial Ratio Analysis

Activity and Operating Ratios

It measures productivity and efficiency for running the business
2010
Activity Ratios / Operating Ratios
Inventory Ratio (IR)
Inventory Ratio - Days
11.20x
32.59
Definition
Cost of Revenues/Avg Inventory
365 / IR
Please note that there are a lot of ratios establish by specialization (i.e. for a Hotel
company is Occupancy Rate or for a Cable company is revenue per subscriber)
21
Financial Ratio Analysis

Profitability Ratio

How profitable is the company
2010
Profitability Ratios
Gross Margin
EBITDA Margin
EBIT Margin
Return on Assets (ROA)
Gross Return on Assets
Return on Equity (ROE)
22
62.2%
39.0%
33.2%
4.8%
11.8%
8.1%
Definition
Gross Margin / Revenues
EBITDA / Revenue
EBIT / Revenue
NI / Avg Assets
EBIT / Avg Assets
NI / Avg Equity