Accounting Literacy for
Litigators and Corporate
Counsel
Multnomah Bar Association
October 29, 2015


Jay Sickler is a CPA, and is accredited as a
business valuation and financial forensics
expert by the American Society of Appraisers
(ASA) and the American Institute of CPAs
(ABV and CFF).
His firm Cogence Group exclusively provides
financial forensics and business valuation
services to attorneys, corporations, and
business owners.


Sarah Padfield is a CPA and a Principal with
Delap, one of Portland’s largest local CPA
firms.
She has over eleven years of experience in
public accounting. She provides assurance
services for private, closely held businesses
of all sizes.

Timothy Snider is a partner at Stoel Rives
and chairs its litigation practice group. His
practice emphasizes complex business
litigation.
Goals of Today’s Session



Help you better understand “business
scorekeeping”
Update you on new(er) disclosure
requirements for financial reporting by
public and private companies
Provide tools to challenge the financial
picture presented
Goals of Today’s Session



Talk about when you need to call in an
expert and how they can help early on
Discuss the types of information an
expert needs and what might not be
relevant
Raise awareness about information to
be gleaned from a company’s financial
statements
Accounting Methods
Accounting Methods




Cash Basis (not according to Generally
Accepted Accounting Principles)
Accrual Basis (GAAP)
Other Basis (not GAAP)
 Modified Cash
 Tax Basis
Managerial Accounting
 Internally prepared and used
 Customized
Cash Basis



Revenue Recorded when Cash
Received
Expenses Recorded when Cash Paid
Out
Not to be Confused with a Statement of
Cash Flow
Accrual Basis





“Matching” revenue and expenses in same
period
Recognize revenue when earned, not when
received
Recognize expenses when incurred, not when
paid
Follows “GAAP”
Allows for comparability of businesses
Financial Statements Anatomy
Basic Financial Statement
Components

Balance Sheet

Income Statement

Statements of Cash Flows

Notes to Financial Statements

All required to comply with
GAAP
Balance Sheet
Snapshot of the financial health of a
business at a particular point in time
|--------------------------------|--------------------------------|
12/31/Y1
12/31/Y2
12/31/Y3
Apple, Inc.
APPLE INC
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands)
September
24, 2011
September
25, 2010
ASSETS:
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, less allowances of $53 and $55, respectively
Inventories
Deferred tax assets
Vendor non-trade receivables
Other current assets
$
9,815 $
16,137
5,369
776
2,014
6,348
4,529
11,261
14,359
5,510
1,051
1,636
4,414
3,447
Total current assets
44,988
41,678
Long-term marketable securities
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Other assets
55,618
7,777
896
3,536
3,556
25,391
4,768
741
342
2,263
Balance Sheets
September
24, 2011
September
25, 2010
ASSETS:
Current assets: $ 116,371 $ 75,183
Cash and cash equivalents
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Short-term marketable
$ 14,632 $ securities
12,015
Accounts payable
9,247
5,723
Accrued expenses
less
receivable,
Accounts
4,091
2,984 allowances of $53 and $55, respectively
Deferred revenue
27,970
20,722
Total current liabilities
Inventories
1,686
1,139
Deferred revenue – non-current
10,100
5,531
Other non-current liabilities
Deferred tax assets
39,756
27,392
Total liabilities
Vendor non-trade receivables
Commitments and contingencies
Shareholders’ equity:
Other current assets
Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares
Total assets
issued and outstanding, respectively
Retained earnings
Accumulated other comprehensive income/(loss)
13,331
10,668
76,615
47,791
37,169
assets
Total current 62,841
443
(46.00)
Total shareholders’ equity
securities
Long-term marketable
$ 116,371
$ 75,183
See accompanying Notes toProperty,
Consolidated Financial
Statements.
and equipment, net
plant
Goodwill
Acquired intangible assets, net
Other assets
Total liabilities and shareholders’ equity
Total assets
9,815 $
16,137
5,369
776
2,014
6,348
4,529
11,261
14,359
5,510
1,051
1,636
4,414
3,447
44,988
41,678
55,618
7,777
896
3,536
3,556
25,391
4,768
741
342
2,263
$ 116,371 $
75,183
$
Apple, Inc.
APPLE INC
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands)
September
24, 2011
ASSETS:
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, less allowances of $53 and $55, respectively
Inventories
Deferred tax assets
Vendor non-trade receivables
Other current assets
Total current assets
Long-term marketable securities
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY:
$
9,815 $
16,137
5,369
776
2,014
6,348
4,529
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
896
$
12,015
5,723
2,984
27,970
20,722
1,686
10,100
1,139
5,531
39,756
27,392
13,331
62,841
443
10,668
37,169
(46.00)
76,615
47,791
$ 116,371 $
75,183
75,183
Deferred revenue – non-current
Other non-current
liabilities
$ 14,632 $ 12,015
9,247
14,632 $
9,247
4,091
741
3,536
342
Total
3,556 current
2,263 liabilities
5,723
4,091
2,984
Total
liabilities
27,970
20,722
Total current liabilities
Deferred revenue – non-current
Other non-current liabilities
11,261
14,359
5,510
1,051
1,636
4,414
3,447
Current liabilities:
Accounts payable
Accrued
expenses
44,988
41,678
55,618
25,391
Deferred
revenue
7,777
4,768
$ 116,371 $
Total assets
September September
24, 2011
25, 2010
September
25, 2010
1,686
1,139
39,756
27,392
10,100
5,531contingencies
Commitments
and
Total liabilities
Shareholders’ equity:
Common
stock,
no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares
13,331
10,668
62,841
37,169
issued and
outstanding,
respectively
443
(46.00)
76,615
47,791
Total shareholders’ equity
Retained
earnings
$ 116,371 $ 75,183
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
Accumulated other comprehensive income/(loss)
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares
issued and outstanding, respectively
Retained earnings
Accumulated other comprehensive income/(loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
Apple, Inc.
APPLE INC
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares which are reflected in thousands)
September
24, 2011
ASSETS:
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, less allowances of $53 and $55, respectively
Inventories
Deferred tax assets
Vendor non-trade receivables
Other current assets
9,815 $
16,137
5,369
776
2,014
6,348
4,529
11,261
14,359
5,510
1,051
1,636
4,414
3,447
Total current assets
44,988
41,678
Long-term marketable securities
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Other assets
55,618
7,777
896
3,536
3,556
25,391
4,768
741
342
2,263
$ 116,371 $
75,183
Total assets
$
September
25, 2010
Assets = Liabilities + Equity
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Total assets
$
Total current liabilities
Deferred revenue – non-current
Other non-current liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 1,800,000 shares authorized; 929,277 and 915,970 shares
issued and outstanding, respectively
Retained earnings
Accumulated other comprehensive income/(loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
14,632 $
9,247
4,091
12,015
5,723
2,984
27,970
20,722
1,686
10,100
1,139
5,531
Total liabilities and shareholders’ equity
39,756
27,392
13,331
62,841
443
10,668
37,169
(46.00)
76,615
47,791
$ 116,371 $
75,183
$
116,371 $
75,183
$
116,371 $
75,183
Income Statement


Business activity from one point in time
through another point in time.
Measures operating performance and
profitability of business.
Apple, Inc.
Statements of Operations/Income
Statements
APPLE INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
2011
108,249 $
64,431
2010
65,225 $
39,541
43,818
25,684
17,222
Operating expenses:
Research and development
Selling, general and administrative
2,429
7,599
1,782
5,517
1,333
4,149
Total operating expenses
10,028
7,299
5,482
Operating income
Other income and expense
33,790
415
18,385
155
11,740
326
Income before provision for income taxes
Provision for income taxes
34,205
8,283
18,540
4,527
12,066
3,831
Three years ended September 24, 2011
Net sales
Cost of sales
$
Gross margin
2009
42,905
25,683
Net income
$
25,922 $
14,013 $
8,235
Earnings per common share:
Basic
Diluted
$
$
28.05 $
27.68 $
15.41 $
15.15 $
9.22
9.08
Shares used in computing earnings per share:
Basic
Diluted
924,258
936,645
See accompanying Notes to Consolidated Financial Statements.
909,461
924,712
893,016
907,005
Apple, Inc.
Statements of Operations/Income Statements
APPLE INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except number of shares which are reflected in thousands and per share amounts)
Three years ended September 24, 2011
Net sales
Cost of sales
$
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
2011
108,249 $
64,431
2010
65,225 $
39,541
2009
42,905
25,683
43,818
25,684
17,222
2,429
7,599
1,782
5,517
1,333
4,149
2011
108,249 $
64,431
2010
65,225 $
39,541
43,818
25,684
17,222
Operating expenses:
Research and development
Selling, general and administrative
2,429
7,599
1,782
5,517
1,333
4,149
Total operating expenses
10,028
7,299
5,482
Operating income
Other income and expense
33,790
415
18,385
155
11,740
326
Income before provision for income taxes
Provision for income taxes
34,205
8,283
18,540
4,527
12,066
3,831
25,922 $
14,013 $
Three years ended September 24, 2011
Net sales
Cost of sales
10,028
7,299
5,482
33,790
415
18,385
155
11,740
326
34,205
8,283
18,540
4,527
12,066
3,831
$
25,922 $
14,013 $
8,235
$
$
28.05 $
27.68 $
15.41 $
15.15 $
9.22
9.08
Total operating expenses
Operating income
Other income and expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
Gross margin
Shares used in computing earnings per share:
Basic
Diluted
924,258
936,645
909,461
924,712
$
2009
42,905
25,683
893,016
907,005
See accompanying Notes to Consolidated Financial Statements.
Net income
$
8,235
Statements of Cash Flows



Operating Activities
 Involves the cash effects of transactions that
enter into the determination of net income
Investing Activities
 Involves the cash effects of making and
collecting loans, acquiring and disposing of
investments, including property, plant, and
equipment
Financing Activities
 Involves the cash effects of liability and
owners’ equity section, including borrowing
and repaying money
Statements of Cash Flows
APPLE INC
CONS OLIDATED S TATEMENTS OF CAS H FLOWS
(In millions)
Three years ended S eptember 24, 2011
Cash and cash equivalents, beginning of the year
Operating activities:
Net income
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation, amortization and accretion
Share-based compensation expense
Deferred income tax expense
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Vendor non-trade receivables
Other current and non-current assets
Accounts payable
Deferred revenue
Other current and non-current liabilities
Cash generated by operating activities
2011
$ 11,261
2010
$
5,263
2009
$ 11,875
25,922
14,013
8,235
1,814
1,168
2,868
1,027
879
1,440
734
710
1,040
143
275
(1,934)
(1,391)
2,515
1,654
4,495
(2,142)
(596) )
(2,718)
(1,610)
6,307
1,217
778
(939)
54
586
(713)
92
521
(161)
37,529
18,595
10,159
Statements of Cash Flows
Investing activities:
Purchases of marketable securities
Proceeds from maturities of marketable securities
Proceeds from sales of marketable securities
Payments made in connection with business acquisitions, net of cash acquired
Payments for acquisition of property, plant and equipment
Payments for acquisition of intangible assets
Other
Cash used in investing activities
(102,317)
20,437
49,416
(244)
(4,260)
(3,192)
(259)
)
)
)
)
)
(40,419) )
(57,793)
24,930
21,788
(638
(2,005)
(116)
(20)
(46,724)
19,790
10,888
(1,144)
(69)
(175)
(13,854) )
(17,434)
Statements of Cash Flows
Financing activities:
Proceeds from issuance of common stock
Excess tax benefits from equity awards
Taxes paid related to net share settlement of equity awards
831
1,133
(520) )
912
751
(406) )
475
270
(82)
1,444
1,257
663
(1,446) )
5,998
(6,612)
Cash generated by financing activities
(Decrease)/increase in cash and cash equivalents
Cash and cash equivalents, end of the year
$
9,815
$
11,261
$
5,263
Supplemental cash flow disclosure:
Cash paid for income taxes, net
$
3,338
$
2,697
$
2,997
See accompanying Notes to Consolidated Financial Statements.
Notes to Financial Statement
 Significant Accounting Policies
 Inventory
 Income Taxes
 Fixed assets & Long-Lived Assets
 Intangibles
 Marketable Securities
 Debt
 Related Party Transactions
 Subsequent Events
 Commitments and Contingencies
Notes to Financial Statement
•
Critical Accounting Policies and Estimates (from
Apple Inc FS)
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles (“GAAP”)
and the Company’s discussion and analysis of its financial condition and
operating results require the Company’s management to make judgments,
assumptions and estimates that affect the amounts reported in its
consolidated financial statements and accompanying notes. Note 1,
“Summary of Significant Accounting Policies” of Notes to Consolidated
Financial Statements in this Form 10-K describes the significant accounting
policies and methods used in the preparation of the Company’s
consolidated financial statements. Management bases its estimates on
historical experience and on various other assumptions it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates and such differences may
be material.
Notes to Financial Statement
•
Inventory Valuation and Inventory Purchase
Commitments
The Company must order components for its products and build inventory in
advance of product shipments. The Company records a write-down for
inventories of components and products, including third-party products held
for resale, which have become obsolete or are in excess of anticipated
demand or net realizable value. The Company performs a detailed review
of inventory each fiscal quarter that considers multiple factors including
demand forecasts, product life cycle status, product development plans,
current sales levels, and component cost trends. The industries in which the
Company competes are subject to a rapid and unpredictable pace of
product and component obsolescence and demand changes. If future
demand or market conditions for the Company’s products are less favorable
than forecasted or if unforeseen technological changes negatively impact
the utility of component inventory, the Company may be required to record
additional write-downs, which would negatively affect its results of
operations in the period when the write-downs were recorded.
Notes to Financial Statement
•
Inventory Valuation and Inventory Purchase
Commitments (Continued)
The Company records accruals for estimated cancellation fees related to
component orders that have been cancelled or are expected to be
cancelled. Consistent with industry practice, the Company acquires
components through a combination of purchase orders, supplier contracts,
and open orders based on projected demand information. These
commitments typically cover the Company’s requirements for periods up to
150 days. If there is an abrupt and substantial decline in demand for one or
more of the Company’s products or an unanticipated change in technological
requirements for any of the Company’s products, the Company may be
required to record additional accruals for cancellation fees that would
negatively affect its results of operations in the period when the cancellation
fees are identified and recorded.
Notes to Financial Statement
•
Cash Equivalents and Marketable Securities
All highly liquid investments with maturities of three months or less at the
date of purchase are classified as cash equivalents. The Company’s
marketable debt and equity securities have been classified and accounted
for as available-for-sale. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates the
designations at each balance sheet date. The Company classifies its
marketable debt securities as either short-term or long-term based on each
instrument’s underlying contractual maturity date. Marketable debt securities
with maturities of 12 months or less are classified as short-term and
marketable debt securities with maturities greater than 12 months are
classified as long-term. The Company classifies its marketable equity
securities, including mutual funds, as either short-term or long-term based on
the nature of each security and its availability for use in current operations.
The Company’s marketable debt and equity securities are carried at fair
value, with the unrealized gains and losses, net of taxes, reported as a
component of shareholders’ equity. The cost of securities sold is based upon
the specific identification method.
Other Reports

Corporate Tax Returns
 Not GAAP
 Show adjustments to arrive at tax (IRS) net
income
 SEC Reports – Mostly follow GAAP, some
special rules
 Form 10K
 Public companies required to have an
annual audit
 Form 10Q
 Reviewed quarterly financial statements
Recent GAAP Updates
 Business Combinations
 Determine business vs. asset
acquisition
 All assets and liabilities acquired are
valued at fair value and any residual
payment is considered goodwill (or
negative goodwill)
 Push down accounting is optional
Recent GAAP Updates

Fair value
 What is the price to sell an asset or transfer a
liability
 Certain items are required to be measured at
fair value (business combinations, loans,
equity and debt securities)
 Management has a fair value option for
derivatives and financial instruments
 Fair value is more common in international
accounting standards
Recent GAAP Updates

GAAP current events
 International Financial Reporting Standards
(IFRS) – US GAAP is not likely to be
converging with IFRS
 Certain GAAP is being changed to
conform to IFRS
 US Firms can issue IFRS statements
 Leases – Final standard expected to be
issued Q4 of 2015
 Eliminate operating leases
Recent GAAP Updates

Going Concern
 Old rule – substantial doubt about ability to
continue for 1 year after financial statement
date
 New rule – substantial doubt about ability to
continue for 1 year after financial statements
issued
 Managements plans need to be implemented
to be considered, look for enhanced
disclosures
Recent GAAP Updates
 Miscellaneous changes
 Discontinued operations
 No more development change entities
 Extraordinary items
 Debt issuance costs
 Inventory
Recent GAAP Updates

Private Company changes
 Still GAAP, applicable for non-public
companies
 Goodwill – Can amortize over 10 years,
no impairment testing
 Interest rate swaps
 Variable interest entities in leasing
arrangements
 Intangible assets in business
combinations
Recent GAAP Updates

Revenue Recognition changes
 Currently revenue recorded when earned
and realizable. This varies by industry.
 New – Recognize revenue to depict the
transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to
be entitled in exchange for those goods or
services.
Recent GAAP Updates

Revenue Recognition changes (Continued)
 Impact will vary by industry
 Example: Direct to consumer, smaller
impact compared to software companies,
larger impact
 Effective after 12/15/2017 for public
companies and 12/15/2018 for non-public
When to call in an expert

Determining causation.
 Did the defendant’s wrongful conduct
produce the damage suffered by the
plaintiff?
 Expert testimony can help trier of fact
decide whether plaintiff has proved the
causal link.
 More than correlation must be established.
When to call in an expert

Information gathering in discovery.
 Attorneys rarely know what financial
information is most relevant.
 Discovery requests become unreasonably
burdensome.
 Expert can assist in pinpointing the critical
financial data, using terms of art.
 Most importantly the expert can assess the
quality of the information received so that a
follow-up request can be made.
When to call in an expert

Assessing needed financial discovery.
 If plaintiff suffered economic loss, what
do the financial statements tell you?
 Are there CPA prepared financial
statements, internal financial statements,
tax returns, general ledger, budgets,
forecasts?
 Expert should always be on board to
assist in discovery
request/interrogatories.
What information is helpful?
 Start with summary financial
statements before getting too much
detail.
 Audited or reviewed financials better
than internal financials.
 Most economic damage analyses
need more income and expense detail
than is on a typical income statement.
Financial Statements
Levels of Assurance
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Internal
Compilation
Review
Audit
Levels of Assurance
 The attached report, if any, is
important to read and understand the
level of service provided.
 Effective in 2015 CPAs can prepare
statements but don’t need to issue a
report – called the preparation
standard.
What information is
NOT helpful?
 Detailed registers and many
accounting reports used for internal
management.
 Check copies unless in certain types of
litigation where tracing is necessary.
 Other basic accounting records sent in
discovery to bog you down in paper.
Analysis of Financial
Statements
Profitability Measures
 EBITDA is earnings before interest,
tax, depreciation and amortization.
 Truest measure of operating
performance.
 Next best measure is EBIT, earnings
before interest and tax.
Typical Analysis Measures

Common Sizing

Ratio Analysis

Trend Analysis

Variable vs. Fixed Cost Analysis
Common Sizing

Each line item is expressed as a
percentage of the total

Balance Sheet

As a percentage of total assets

Income Statement
 As a percentage of total sales
Common Sized Analysis
Gross Margin (Gross profit
divided by Sales)
50%
40%
30%
20%
10%
0%
Other Profitability Measures

Return on Equity (“ROE”)


Return on Assets (“ROA”)


Net Income / Equity
Net Income / Total Assets
Price to Earnings (“PE”)

Market Price of Stock to Net Income
Liquidity

Current Ratio =


Current Assets / Current Liabilities
Quick or “Acid Test” Ratio =

Cash + Accounts Receivable + Marketable
Securities / Current Liabilities
Ratio Analysis




Profitability Ratio

Measures degree of profitability
Liquidity Ratio

Measures short-term ability to pay
obligations as they come due
Coverage Ratio

Measures the degree of protection for
long-term creditors and investors
Activity Ratio

Measures the company’s efficient use of
assets
Annual Growth Rates
Historical Industry
2007
2008
2009
2010
2011
Annual Growth Rates
CAGR
Revenue
30.5%
19.9%
-11.7%
11.8%
11.5%
4.2%
Gross Profit
63.3%
0.3%
-9.6%
19.9%
15.4%
4.2%
Operating Costs
-15.8%
-4.6%
30.7%
22.6%
6.5%
4.2%
EBITDA
474.7%
4.0%
-37.9%
16.2%
44.1%
4.4%
1532.0%
4.0%
-40.0%
28.4%
90.1%
3.7%
-8.0%
120.3%
-46.5%
77.0%
17.7%
6.2%
2.4%
313.4%
-42.5%
77.0%
44.1%
10.9%
EBIT
Total Assets
Equity / Member's Capital
Profitability
Historical Industry
2007
2008
2009
2010
2011
Profitability
Average
Gross Profit %
[Gross Profit / Revenue]
51.5%
64.5%
53.9%
55.2%
59.2%
56.9%
0.0%
EBITDA %
[EBITDA / Revenue]
8.3%
36.6%
31.7%
22.3%
23.2%
24.4%
6.5%
EBIT %
[EBIT / Revenue]
2.7%
34.3%
29.7%
20.2%
23.2%
22.0%
5.0%
EBT%
[EBT / Revenue]
2.9%
34.3%
29.7%
20.2%
23.2%
22.1%
4.8%
Net Income %
[Net Income / Revenue]
2.9%
34.3%
29.7%
20.2%
23.2%
22.1%
3.0%
Effective Tax Rate
[Tax/EBT]
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
N/A
N/A
N/A
N/A
N/A
Owners Comp as % of Revenue [Owners Comp / Revenue]
7.6%
Return on Assets
[Net Income / Assets]
11.3%
192.3%
90.7%
101.6%
73.8%
93.9%
8.0%
Return on Equity
[Net Income / Book Equity]
25.4%
389.0%
97.7%
101.9%
74.0%
137.6%
16.67%
Return on Invested Capital
[EBITDAx(1-tax) / Book IC]
76.3%
228.7%
89.6%
97.6%
73.8%
113.2%
Liquidity and Efficiency
Historical Industry
2007
2008
2009
2010
2011
Liquidity
Current Ratio
[Cur. Assets / Cur. Liab.]
3.4
1.9
13.7
391.2
356.5
153.4
1.7
Quick Ratio
[(Cash + AR) / Cur. Liab]
3.2
1.7
10.5
315.4
296.6
125.5
1.3
Cash as % of Assets
[Cash / Assets]
44.9%
2.1%
26.2%
28.7%
38.1%
28.0%
18.1%
[AR / (Revenue/365)]
42.1
55.7
59.7
36.6
49.9
48.8
43.2
[NWC / Revenue]
6.0%
8.0%
21.5%
13.8%
18.8%
13.6%
3.9
5.6
3.0
5.0
3.2
4.2
2.67
150.4
235.6
281.2
293.9
164.0
225.0
12.1
Efficiency
Days Sales Outstanding (DSO)
Working Capital as % of Sales
(excluding cash and cur. portion of LT debt)
Asset Turnover
[Revenue / Assets]
Fixed Asset Turnover
[Revenue / Fixed Assets]
Leverage
Historical Industry
2007
2008
2009
2010
2011
Leverage
Financial Leverage
[Assets / Book Equity]
2.3
2.0
1.1
1.0
1.0
1.5
Debt / Equity
[Total Debt / Book Equity]
0.5
-
-
-
-
0.1
Interest Coverage Ratio
[EBIT / Interest Exp.]
Debt as % of Assets
[Debt / Assets]
N/A
1,950.2
1,461.3
N/A
N/A
1,705.8
2.1
0.37
19.6
21.9%
0.0%
0.0%
0.0%
0.0%
4.4%
17.6%
2.9%
34.3%
29.7%
20.2%
23.2%
22.1%
3.0%
DuPont Formula
Net Profit Margin
x Asset Turnover
= Return on Assets
x Financial Leverage
= Return on Equity
Footnotes:
Industry Data based on 5-Year Industry Report
3.9
11.3%
2.3
25.4%
5.6
192.3%
2.0
389.0%
3.0
90.7%
1.1
97.7%
5.0
101.6%
1.0
101.9%
3.2
73.8%
1.0
74.0%
4.2
93.9%
1.5
137.6%
2.7
8.0%
2.1
16.6%
Trend Analysis – Year to Year
$3,000,000
$2,500,000
$2,000,000
$1,500,000
Gross Margin
$1,000,000
$500,000
$-
Sales
Variable vs. Fixed Cost Analysis



Variable costs fluctuate in direct
proportion to changes in sales/revenue
Fixed costs do not tend to move with
changes in sales/revenue
Expenses can also be semi-variable or
exhibit a step function
Variable Costs
$4,000,000
$3,000,000
$2,000,000
Sales
$1,000,000
Production
Parts
$2009
2010
2011
Fixed Costs
$4,000,000
$3,000,000
Sales
Rent
$2,000,000
$1,000,000
$2009
2010
2011
Semi-Variable Cost

Costs that exhibit both fixed and
variable elements.
 For example warehouse labor
 Permanent labor pool
 Temporary labor pool
Semi-Variable Cost
$2,000,000
Warehouse labor
Sales
$1,000,000
$2009
2010
2011
Stepped Costs

Costs that remain fixed up to a certain
level of production, then increase when
production reaches capacity.
 For example factory rent up to point
where expansion needs to take
place.
Stepped Costs
$2,000,000
Factory Rent
Sales
$1,000,000
$2009
2010
2011
What Did We Learn?



Quality of financial reporting varies
across companies and scope of
reporting.
Understanding your company requires
analysis over time and comparison to
other companies/industry.
Use ratio tools to dig below the surface
and illuminate strengths and
weaknesses.
Questions??