• Accounting: The Basis of Decision-Making
• Net Worth: How well am I doing?
• Financial Status for
Businesses
• Using Ratios to Make
Business Decisions
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Economics
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Economics
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Economics
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Why Do Engineers Need to Understand the
Financial Statements?
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Economics
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Assets
Liabilities
Owners’
Equity
Assets = Liabilities + Owners’ Equity
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Economics
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The Balance Sheet – Dell Computer Co.
Current assets:
Cash
Short-term investments
Account receivables, net
Inventories
Other
Total current assets
Property, plant, and equipment, net
Long-term investments
Equity securities and other
investments
Goodwill and others
Total assets
28-Jan-00 29-Jan-99 Change Percent
$3,809 $1,726
323 923
2,608
391
2,094
273
550
7,681
765
1,048
791
5,807
523
532
$2,803
(600)
514
118
(241)
1,874
242
516
1,673
304
$11,471
---
15
$6,877
121%
-65%
25%
43%
-30%
32%
46%
97%
1,673
289 1927%
$4,594 67%
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued and other
Total current liabilities
Long-term debt
Other
Total liabilities
Stockholders' equity:
Preferred stock
Common stock and capital in excess of $0.01 per value
Retained earnings
Other
Total stockholders' equity
Total liabilities and
stockholders' equity
$3,538
1,654
5,192
508
463
6,163
---
3,583
1,260
465
5,308
$2,397
1,298
3,695
512
349
4,556
---
1,781
606
(66)
2,321
$11,471 $6,877
(c) 2001 Contemporary Engineering
Economics
$1,141
356
1,497
(4)
114
1,607
1,802
654
531
2,987
$4,594
101%
108%
129%
67%
48%
27%
41%
-1%
33%
35%
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Income Statement – Dell Computer Co.
(in millions, except per share amount)
Net revenue
Cost of revenue
Gross margin
Operating expenses:
Selling, general and administrative
Research, development, and engineering
Total operating expenses
Operating income
Other income
Income before income taxes
Provision for income taxes
Net income
Earnings per common share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Retained Earnings:
Balances at beginning of period
Net income
Repurchase of common stocks
Balances at end of period
(c) 2001 Contemporary Engineering
Economics
Fiscal Year Ended
28-Jan-00 29-Jan-99
$25,265 $18,243
20,047 14,137
5,218 4,106
2,387
568
2,955
2,263
1,788
272
2,060
2,046
188
2,451
38
2,084
785 624
$1,666 $1,460
$0.66
$0.61
2,536
2,728
$0.58
$0.53
2,531
2,772
606
1,666
607
1,460
(1,012) (1,461)
$1,260 $606
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Cash Flow Statement – Dell Computer Co.
(in millions)
Cash flows from operating activities:
Net income
Depreciation and amortization
Changes in working capital
Net cash provided by operating activities
Cash flows from investing activities:
Marketable securities:
Purchase
Sales
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Purchase of common stock
Issuance of common stock under employee plans
Proceeds from issuance of long-term debt
Cash received from sale of equity options and other
Repayment of borrowings
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase in cash
Cash at beginning of period
Cash at end of period
(c) 2001 Contemporary Engineering
Economics
Fiscal Year Ended
28-Jan-00 29-Jan-99
$1,666
156
2,104
3,926
$1,460
103
873
2,436
(3,101)
2,319
397
(1,183)
(1,061)
289
20
63
(6)
(695)
35
$2,083
1,726
$3,809
(1,938)
1,304
(296)
(930)
(1,518)
212
494
(812)
(10)
$684
1,042
$1,726
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Tells how much cash a company’s business generates or uses and contains clues to how healthy earnings are
Cash used to buy or received from selling stock, assets, and businesses, plus capital expenditures.
Cash from or paid to outsiders—such as banks or stockholders
Cash Flow Statement
(in millions)
Cash flows from operating activities:
Net income
Depreciation and amortization
Changes in working capital
Net cash provided by operating activities
Fiscal Year Ended
28-Jan-00 29-Jan-99
$1,666 $1,460
156
2,104
3,926
103
873
2,436
Cash flows from investing activities:
Marketable securities:
Purchase
Sales
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Purchase of common stock
Issuance of common stock under employee plans
Proceeds from issuance of long-term debt
Cash received from sale of equity options and other
Repayment of borrowings
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase in cash
Cash at beginning of period
Cash at end of period
(3,101) (1,938)
2,319
397
(1,183)
1,304
(296)
(930)
(1,061) (1,518)
289 212
20
63
494
(6)
(695) (812)
35
$2,083
(10)
$684
1,726 1,042
$3,809 $1,726
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Economics
Lists cash at the beginning and end of the period covered by the filing, plus the change in cash.
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Key Summary of Dell’s Financial Statements
Balance Sheet--January 28, 2000
Assets
Cash
Other current assets
Total current assets
All other assets
Total assets
$3,809
3,872
7,681
3,790
11,471
Liabilities and Stockholders' Equity
Current liabilities
Other liabilities
Total liabilities
5,192
971
6,163
Stockholders' equity:
Common stock
Retained earnings
Other equity
Total stockholders' equity
3,583
1,260
(465)
5,308
Total liabilities and stockholders' equity $11,471
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Economics
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Key Summary Continued
Income Statement--Fiscal Year 2000
Net revenue
Expenses (including income taxes)
Net income
Statement of Retained Earnings--Fiscal Year 2000
Beginning retained earnings
Net income
Purchase and retirement of 56 million shares
Ending retained earnings
Statement of Cash Flows--Fiscal Year 2000
Net cash flow from operating activities
Net cash flow from investing activities
Net cash flow from financing activities
Effect of exchange rate change on cash
Beginning cash
Ending cash
(c) 2001 Contemporary Engineering
Economics
25,265
23,599
$1,666
606
1,666
(1,012)
$1,260
$3,926
(1,183)
(695)
(35)
1,726
$3,804
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Economics
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Ratios that show how a firm uses debt financing and its ability to meet debt repayment obligations
• Debt ratio
• Times-interest-earned ratio
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Economics
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• What It Measures
: The extent to which a form uses debt financing
• How You Compute
: The ratio of total debt to total assets
Total debt
Debt ratio =
Total assets

$6, 163
$11, 471

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Economics
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• What It Measures : The ability of the firm to meet its annual interest payments
• How You Compute
: The ratio of earnings before interest and taxes (EBIT) to interest charges
EBIT
Time - interest - earned ratio =
Interest expense

($2, 451

$34

73 times
$34)
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Economics
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Ratios that show the relationship of a firm’s cash and other assets to its current liabilities
• Current ratio
• Quick ratio
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Economics
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• What It Measures : The extent to which the claims of short-term creditors are covered by assets
• How You Compute
:The ratio computed by dividing current assets by current liabilities
Current assets
Current ratio =
Current liabilities

$7, 681
$5, 192

1 .48
times
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Economics
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• What It Measures : The firm’s ability to pay off short-term obligations without relying on the sale of inventories.
• How You Compute
: This ratio is computed by deducting inventories from current assets and dividing the remainder by current liabilities.
Current assets - Inventories
Quick ratio =
Current liabilities
$7, 681

$391

$5, 192

1 .40
times
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Economics
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A set of ratios which measure how effectively a firm is managing its assets
• Inventory turnover ratio
• Days sales outstanding ratio
• Total assets turnover ratio
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Economics
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• What It Measures : How effectively a firm is managing its inventories.
• How You Compute
: This ratio is computed by dividing sales by inventories
Sales
Inventory turnover ratio =
Average inventory balance

$25,265
2

times
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Economics
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• What It Measures : The average length of time the firm must wait after making a sale before receiving payment
(also known as, average collection period )
• How You Compute
: The ratio computed by dividing accounts receivables by average sales per day
Receivables
DSO (Average collection period) =
Average sales per day

$2, 608
$25,265 / 360

days
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Economics
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• What It Measures : How effectively the firm uses its plant and equipment in generating its sales
• How You Compute
: The ratio computed by dividing sales by total assets
Sales
Total assets turnover ratio =
Total assets

$25,265
$11, 471

times
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Economics
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A set of ratios which show the combined effects of liquidity, asset management, and debt on operating results
• Profit margin on sales
• Return on total assets
• Return on common equity
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Economics
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• How It Measures : the profit per dollar of sales
• How You Compute
: Computed by dividing net profit after taxes by sales
Net income available to
Profit margin on sale = common stockholders
Sales

$1, 666
$25,265

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Economics
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• What It Measures : The rate of return on common stockholders’ investment
• How You Compute
: The ratio of net income after taxes to common equity
Net income available to common stockholders
Return on common equity =
Average common equity

$1, 666
($5, 308

$2, 321 ) / 2

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Economics
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A set of ratios that relate the firm’s stock price to its earnings and book value per share
• P/E ratio
• Market/book ratio
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Economics
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• What It Measures : The dollar amount investors will pay for $1 of current earnings
• How You Compute
: The ratio of the price per share to earnings per share
Price per share
P / E ratio =
Earnings per share

$38.
50
$0.
61

.
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Economics
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• What It Measures : Indicates how investors regard the company – a higher ratio indicates that investors are willing to bet a higher return on investment
• How You Compute : The ratio of a stock’s market price to its book value
Market / book ratio =
Market price per share
Book value per share

$38.
50
$1.
31

times
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Economics
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• Ratio analysis is useful, but analysts should aware of ever-changing market conditions and make adjustments necessary.
• It is difficult to generalize about whether a particular ratio is good or bad.
• Ratio analysis based on any one year may not represent the true business condition.
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Economics
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The primary purposes of this chapter were
(1) to describe the basic financial statements and (2) to present some background information on cash flows and corporate profitability, and (3) to discuss techniques used by investors and mangers to analyze them.
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Economics
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