FUNDAMENTAL GEEK
FINANCIAL STATEMENTS AND DECISION
MAKING
SEGMENT THREE
If you haven’t printed this guide, now would be a great time to do so!
Table of Contents
Movie
FG3-Forty
Five
Pages
Timing
0:00 – 1:18
65-66
FG3-Forty Six
FG3-Forty
Seven
FG3-Forty
Eight
FG3-Forty
Nine
FG3-Fifty
FG3-Fifty
One
FG3-Fifty
Two
FG3-Fifty
Three
FG3-Fifty
Four
67
1:18 – 1:52
4:15 – 4:41
4:41 – 5:41
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70
5:41 – 7:03
7:03 – 8:04
8:04 – 8:55
8:56 – 11:47
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72-73
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11:47 – 15:03
15:03 – 16:04
16:04 – 16:37
16:37 – 18:10
18:10 – 21:07
21:07 – 24:30
24:30 – 25:01
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25:01 – 30:14
30:14 – 32:20
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32:20 – 36:02
36:02 – 37:24
37:24 – 37:45
37:45 – 38:55
83
38:55 – 42:52
Topic
Return on Assets (ROA)
“Return” Outcomes and
Expectations”
Return on Assets
ROA Performance
ROA Formula – The
“Comprehensive” Bottom Line
Completing the Trend Table
Calculating ROA for Year 2
Calculating ROA for Years 1 & 3
Analyzing ROA Performance
Evaluating ROA
Disadvantages of ROA
Balance Sheet Analysis
Working Capital
Calculating Working Capital
Current Ratio - Calculation
The Performance of Assets –
Fixed Asset Turnover Ratio
(FATR)
Calculating FATR
Capital Structure – Debt vs.
Equity
Calculating Debt vs. Equity
ROA Summary
The Bottom Line Triangle
Final Thoughts on the 3 Bottom
Lines
My 5 Partners
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Outcomes & Expectations
After successfully completing Segment 5, you will be
able to:
• Understand why the “Return” bottom line matters
to your growing business
• Identify and calculate the formula for ROA
• Name the crucial drivers of ROA
• Perform a trend analysis of ROA
• Recall the strengths and weaknesses of ROA as a
bottom line
• Analyze balance sheet information from three
different viewpoints to identify important
performance trends and make strategic decisions.
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The Balance Sheet bottom line is:
Managing assets is also about creating good:
We chose ROA as the bottom line because:
ROA indicates:
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The Formula:
ROA =
Net Income
Total Assets
X 100
Why is ROA considered a “comprehensive bottom
line”?
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Using the MultiMax Balance Sheet and Income
Statement, fill in the numbers needed for ROA:
Item
Year 3
Year 2
Year 1
Net Income (before
taxes)
Total Assets
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Now we will calculate the ROA for Year 2:
Net Income
Total Assets
ROA =
X 100
Remember, we are using Earnings before taxes!
Year 2 Net Income =
Year 2 Total Assets =
NI
TA
=
=
X 100 =
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Now we will calculate Years 1&3:
ROA = Net Income
Total Assets
Item
X 100
Year 3
Year 2
Net Income (before
taxes
22,530
Total Assets
147,411
ROA
Year 1
15.3%
Which direction do we want ROA going?
How did MultiMax do over the last 3 years?
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To Review:
The ROA ratio improves when what increases?
Or, what decreases?
Notes:
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To further analyze the Balance Sheet, we will look at
three major categories.
First, let’s look at Working Capital.
Working Capital is defined as:
minus
What are the main components of Current Assets?
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What is the main component of Current Liabilities?
What two financial statements do these components
impact?
Working Capital is primarily evaluated by what bottom
line?
Working Capital is concerned with managing:
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Calculating Working Capital:
Please fill in the table below using the Balance Sheet
from your participant guide.
Item
Year 3
Year 2
Year 1
Current Assets
Current Liabilities
Working Capital = Current Assets – Current Liabilities
Working Capital
Is this good or bad? Hard to tell, but there is a
better way…
Do you remember way back in Basic Geek when we
completed the Current Ratio?
Well, that is just the deeper dive of Working Capital!
Next we will re-visit the Current Ratio and calculate it
for Year 3.
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Current Ratio:
Item
Current Assets
Current Liabilities
Year 3
Year 2
Year 1
141,748
36,970
126,390
36,232
98,410
26,168
Formula:
Current Assets
=
Current Liabilities
Item
141,748
36,970
Year 3
=
Year 2
3.83
Year 1
Now let’s calculate the ratios for years 1&2:
Current Ratio
In “dollar English”, a “3.83 Current Ratio” in year 3
means that for every $3.83 of current assets, the
company has
in current liabilities.
$1.00
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Now let's look at the Performance of Assets.
There are two tests for performance of assets:
Since you are already an expert in ROA, we will focus
on the second test.
We will review at the Fixed Asset Turnover ratio:
The Formula:
Fixed Asset Turnover Ratio =
Sales
Fixed Assets
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Please fill in the Balance Sheet and Income Statement
numbers needed to calculate the Fixed Asset Turnover
ratio.
Fixed Asset Turnover Ratio =
Item
Year 3
Sales
Fixed Assets
Year 2
Year 1
Fixed
Sales Assets
Fixed Assets
Now calculate the Ratio:
FA Turnover
Which way do you think these numbers should be
going?
Notes:
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Now we will look at Capital Structure.
A company’s capital structure refers to its relative
percentage of debt capital versus
On which statement would you find Equity and
Liabilities?
Notes:
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Calculating Debt vs. Equity Ratio:
Please fill in the required numbers from the Balance
Sheet:
Item
Year 3
Year 2
Year 1
Total Liabilities
Total SH Equity
Formula =
Total Liabilities
Total Stockholders Equity
Debt/Equity Ratio
In “Dollar English”, how would you express the debt to
equity performance in year 1?
In year 1, for every dollar in equity, we had
of debt.
Notes:
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ROA is comprehensive because it includes elements of
managing net income, assets, and cash flow.
ROA is a unique bottom line because it is a ratio, which
means you can compare performance of organizations
or divisions of different sizes.
With ROA, you can compare:
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Final thoughts on the Three Bottom Lines:
The Income Bottom Line:
The Operating Cash Flow Bottom Line:
The Return on Assets Bottom Line:
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How does your new knowledge about Return affect
your 5 Partners?





Lenders – our Banker:
Vendors:
Customers:
Employees:
Financial Support Staff:
How does your new knowledge about Net Profit affect
your 5 Partners?
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




Lenders – our Banker:
Vendors:
Customers:
Employees:
Financial Support Staff:
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MultiMax Financial Statements
MultiMax Annual Income Statement
Sales
Cost of Sales
Gross Profit
Year 3
279,672
158,838
120,834
Year 2
241,896
136,404
105,492
Year 1
202,621
117,199
85,422
SG&A or Operating Expenses
Selling
General and Administrative
Total SG&A
25,305
72,942
98,248
21,977
61,006
82,983
16,276
53,887
70,163
Earnings from operations
22,586
22,509
15,259
Other Income (expense)
Interest Income
Interest expense
Total Other Income/Expense
2,008
-933
1,075
1,670
-1,649
21
874
-1,573
-700
Earnings before income taxes
23,661
22,530
14,559
Income tax expense
8,524
8,331
5,616
Net Income
15,137
14,199
8,943
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MultiMax Annual Balance Sheet
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivables
Inventory
Prepaid expenses and other current
assets
Total current assets
Year 3
Year 2
Year 1
39,903
20,900
35,585
40,842
32,097
12,000
37,155
40,175
39,401
0
28,298
27,234
4,517
141,748
4,962
126,390
3,477
98,410
Fixed Assets (Property and equipment)
Total Assets
23,847
$165,595
21,021
$147,411
17,982
$116,391
Current Liabilities:
Accounts payable
Accrued expenses
Total current liabilities
32,981
3,990
36,970
32,345
3,887
36,232
21,887
4,281
26,168
Long term liabilities
Total Liabilities
3,292
40,263
21,361
57,593
21,458
47,625
Stockholder's equity
Owner's equity
Retained Earnings
51,626
73,707
31,283
58,534
25,263
43,503
Total stockholder's equity
125,333
89,817
68,766
Total Liabilities and Stockholders Equity
$165,595
$147,411
$116,391
Liabilities And Stockholders Equity
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MultiMax Annual Statement of Cash flows
Year 3
Year 2
Year 1
15,137
14,199
8,943
3,444
428
341
3,241
1,172
18
4,414
834
-930
1,590
-609
283
-334
-9,599
-12,873
-706
268
-4,421
2,640
-174
-495
591
-601
9,913
-424
2,755
1,533
20,271
5,208
15,099
-15,135
($15,135)
-17,512
($17,512)
-2,725
($2,725)
Cash flows from financing activities
Long term liabilities
1,982
4,584
-149
Net cash provided by financing
activities
1,982
4,584
-149
7,118
-7,720
12,225
Cash flows from operating activities:
Net Earnings
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation of property and equipment
Provision for bad debts and returns
Loss (gain) on disposal of equipment
(Increase) decrease in assets:
Receivables
Inventory
Prepaid expenses and other current assets
Other assets
Increase (decrease) in liabilities:
Accounts payable
Accrued expenses
Net Cash provided by operating
activities (OCF)
Cash flows used in investing activities
Fixed Asset Investment (PP&E)
Net cash used in investing activities
Net increase (decrease) in cash and cash
equivalents
Effect of exchange rates on cash and cash
equivalents
Cash and cash equivalents at beginning of
year
688
416
-354
32,097
39,401
27,531
Cash and cash equivalents at end of year
39,903
32,097
39,401
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