slides show summary agec 432 spring 2007
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Slides Show Summary AGEC 432 Spring 2007. Basic Structure of the Balance Sheet. Assets : Liabilities and Net Worth: Current assets Current liabilities plus Intermediate assets plus Intermediate liabilities - PowerPoint PPT PresentationTRANSCRIPT
Slides Show SummaryAGEC 432
Spring 2007
Basic Structure of the Balance Sheet
Assets: Liabilities and Net Worth:
Current assets Current liabilities
plus Intermediate assets plus Intermediate liabilities
plus Long term assets plus long term liabilities
plus Net worth (residual value)(residual value)
equals Total assets equals Total liabilities and net worth
Assets: Liabilities and Net Worth:
Current assets Current liabilities
plus Intermediate assets plus Intermediate liabilities
plus Long term assets plus long term liabilities
plus Net worth (residual value)(residual value)
equals Total assets equals Total liabilities and net worth
Basic Structure of Income Statement
Value of farm productionMinus Farm expensesEquals Income from operationsPlus Gain (loss) on sale of intermediate and long term assetsEquals Net farm incomePlus Non-farm incomeEquals Income (loss) before taxes and extraordinary itemsMinus Provision for income taxesEquals Income before extraordinary itemsPlus Extraordinary itemsEquals Net income
Value of farm productionMinus Farm expensesEquals Income from operationsPlus Gain (loss) on sale of intermediate and long term assetsEquals Net farm incomePlus Non-farm incomeEquals Income (loss) before taxes and extraordinary itemsMinus Provision for income taxesEquals Income before extraordinary itemsPlus Extraordinary itemsEquals Net income
Basic Structure of Cash Flow Statement
Cash availableMinus Cash requiredEquals Cash available less cash requiredPlus Savings withdrawalsEquals Cash positionPlus Net borrowingMinus Other uses of cashMinus Additions to savingsEquals Ending cash balance
Cash availableMinus Cash requiredEquals Cash available less cash requiredPlus Savings withdrawalsEquals Cash positionPlus Net borrowingMinus Other uses of cashMinus Additions to savingsEquals Ending cash balance
Monthly Cash Position
January February March
Cash availableLess Cash requiredPlus Savings withdrawalEquals Cash position
A monthly cash flow statement indicates months of cash flow and surpluses or deficits before borrowing on a LOC…
The value of the LOC to request is at least equal to the highest monthly cash flow deficit.
A monthly cash flow statement indicates months of cash flow and surpluses or deficits before borrowing on a LOC…
The value of the LOC to request is at least equal to the highest monthly cash flow deficit.
? ? ?
Repayment Capacity from Operations
Debt Repayment Capacity Report
Farm sources of term debt repayment capacity: Net income Adjustments to net income: Plus Depreciation Less Gain (loss) on sale of assets Less Non-farm income Less Family living withdrawals Less Gifts to others Subtotal Term debt repayment capacity from operations
$0 $0
$0$0$0$0$0$0 $0
$0
+
Repayment margin = repayment capacity – scheduled paymentsCoverage ratio > 1.0 if repayment margin is positive
Repayment margin = repayment capacity – scheduled paymentsCoverage ratio > 1.0 if repayment margin is positive
Slides from Show #2
2006 Cash Flow StatementSources of cash:Beginning cash balanceCash receipts from product salesOther sources of cash Total sources of cash
Uses of cash:Cash operating expensesInterest paymentsPrincipal paymentsCapital expendituresWithdrawals of cashOther selected uses of cashEnding cash balance Total uses of cash
Basic structure:Total sources = total uses
2006 Income StatementCash receipts from product salesOther income Total income
Cash operating expensesInterest paymentsOther cash expensesDepreciation Total expenses
Net income from operationsAllowance for taxes Net income
Basic structure:EBIT = total income – total expenses + interest payments
Interrelationships Between Financial Statements
Balance Sheet 12/31/06Ending cash balanceOther current assets Total current assets
Machinery and equipmentBuildings and improvementsLand Total assets
Accounts payable Current loan paymentAllowance for taxesOther current liabilities Total current liabilities
Remaining balance on loans Total liabilities
Equity
Basic Structure:Equity = total assets – totalLiabilitiesEquity = Retained net Income + asset revaluations
Other statements and schedules:Statement of Change in Owner EquityDepreciable asset schedules
In Class Problem
See Problem #1 under Quizzes and Exams link on WebsiteSee Problem #1 under Quizzes and Exams link on Website
Slides from Show #3
None… Demonstrated impacts of price and yield shocks to financial statements and financial indicators.
None… Demonstrated impacts of price and yield shocks to financial statements and financial indicators.
Slides from Show #4
Lessons from Beaver Study
• Indicators of Indicators of growth/survival:growth/survival:– Increasing liquidity– Increasing solvency– Increasing debt
repayment capacity– Increasing profitability
• Indicators of Indicators of potential failure:potential failure:– Declining liquidity– Declining solvency– Decreasing debt
repayment capacity– Decreasing profitability
Trends in Indicators
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Year Before Failure
Net Cash Income-to-Total Debt
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
1 2 3 4 5
Year Before Failure
Working Capital-to-Total Assets
0.000.050.100.150.200.250.300.350.400.45
1 2 3 4 5
Year Before Failure
Total Debt-to-Total Assets
0.000.100.200.300.400.500.600.700.800.90
1 2 3 4 5
Year Before Failure
FailedFailed
FailedFailed
FailedFailed
FailedFailed
Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research
Historical Analysis
• A look backwards like the Beaver study.
• Comparison of current performance with past performance.
• Recommend doing this at the enterprise level as well as for the farm as a whole.
• Reasons underlying unwanted trends such as the declines in last declines in last two years?two years?
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
1 2 3 4 5
Prior Years
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
Similar firms
Your firm
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
• Address reasons why your firm is performing more poorly than other comparable operations before it is too latebefore it is too late.
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
• Address reasons why your firm is performing more poorly than other comparable operations before it is too latebefore it is too late.
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
• Address reasons why your firm is performing more poorly than other comparable operations before it is too latebefore it is too late.
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
• Address reasons why your firm is performing more poorly than other comparable operations before it is too latebefore it is too late.
Rate of Return on Assets
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
1 2 3 4 5
Prior Years
Comparative Analysis
• Comparing current performance with similar operations like the Beaver study.
• Benchmark analysis at enterprise level when possible.
• Address reasons why your firm is performing more poorly than other comparable operations before it is too latebefore it is too late.
Slides from Show #5
Comparison of Cost Systems
Features
Job Order Cost System
Process Cost System
Work in process accounts
One work in process account
Multiple work in process accounts
Documents used Job cost sheets Production cost reports
Determination of total manf. costs
Each job Each period
Unit-cost computations
Cost of each job/ units produced for the job
Total manf. costs/ units produced during the period
Comparison of Cost Systems
Features
Job Order Cost System
Process Cost System
Work in process accounts
One work in process account
Multiple work in process accounts
Documents used Job cost sheets Production cost reports
Determination of total manf. costs
Each job Each period
Unit-cost computations
Cost of each job/ units produced for the job
Total manf. costs/ units produced during the period
AB Overhead RateAB Overhead rate = Overhead per activity AB Overhead rate = Overhead per activity ÷ Cost driver per activity÷ Cost driver per activityInitial status:Initial status:Activity Cost Pool Overhead Driver AB overhead activity rateSetting up machines $300,000 1,500 setups $200/setupMachining $500,000 50,000 hours $10/hourInspecting $100,000 2,000 inspection $50/inspection Total $900,000
Step 1: Assigning overhead driver activity to products:Step 1: Assigning overhead driver activity to products:Activity Cost Pool Cost driver Driver Product 1 Product 2
activitySetting up machines # setups 1,500 500 1,000500 1,000Machining Hours 50,000 30,000 20,00030,000 20,000Inspecting # inspections 2,000 500 1,500500 1,500
AB Overhead Rate
Step 1: Assigning overhead driver activity to products:Step 1: Assigning overhead driver activity to products:Activity Cost Pool Cost driver Driver Product 1 Product 2
activitySetting up machines # setups 1,500 500 1,000Machining Hours 50,000 30,000 20,000Inspecting # inspections 2,000 500 1,500
Step 2: Partitioning of overhead:Step 2: Partitioning of overhead: Overhead Product 1 Product 2___Setting up machines $300,000 (33%) $100,000 (67%) $200,000Machining $500,000 (60%) $300,000 (40%) $200,000Inspecting $100,000 (33%) $25,000 (67%) $75,000
33% = 500/1,500 and 67% = 1,000/1,50033% = 500/1,500 and 67% = 1,000/1,500
AB Overhead RateStep 2: Partitioning of overhead:Step 2: Partitioning of overhead: Overhead Product 1 Product 2Setting up machines $300,000 $100,000 $200,000Machining $500,000 $300,000 $200,000Inspecting $100,000 $25,000 $75,000 Total $900,000 $425,000 $475,000Step 3: Overhead costs per unit:Step 3: Overhead costs per unit:Units produced 25,000 5,000 Overhead cost per unit $17 $95
Traditional overhead cost per unit* $30 $30
* $900,000 divided by 30,000 units
Avoids overstating profitability of some enterprises and
understating profitability of others
Avoids overstating profitability of some enterprises and
understating profitability of others
AB Overhead Rate Product 1 Product 2
COP unit costs with ABC costing:COP unit costs with ABC costing:Direct materials $40 $30Direct labor $12 $12ABC overhead $17 $95 Total unit costs $69 $137
COP unit costs with traditional costing:COP unit costs with traditional costing:Direct materials $40 $30Direct labor $12 $12Traditional overhead * $30 $30 Total unit costs $82 $72
* $900,000 divided by 30,000 units
Traditional overhead costing suggests that Product 2 is cheaper to produce than
Product 1, which is not true!which is not true!
Traditional overhead costing suggests that Product 2 is cheaper to produce than
Product 1, which is not true!which is not true!
Slides from Show #6
Sales BudgetSales Budget
Production BudgetProduction Budget
Direct MaterialsBudget
Direct MaterialsBudget
Direct LaborBudget
Direct LaborBudget
OverheadBudget
OverheadBudget
Selling and AdministrativeExpense Budget
Selling and AdministrativeExpense Budget
Budgeted IncomeStatement
Budgeted IncomeStatement
Capital Expenditureand Cash Budgets
Capital Expenditureand Cash Budgets
Budgeted Cash Flow Statement
Budgeted Cash Flow Statement
BudgetedBalance Sheet
BudgetedBalance Sheet
Slides from Show #7
None … showed sensitivity of break even prices and yields to changes in unit costs of production
None … showed sensitivity of break even prices and yields to changes in unit costs of production
Slides from Show #8
PAST FUTUREPRESENT
Historical analysis
Comparative analysis
Historical price and yield trends
Pro forma analysis
Forming expectations about future prices, costs and productivity
Ad hoc extrapolations
Projections based upon available outlook data
Projections based upon econometric analysis
Ad Hoc Modeling Approaches
?
Naïve model – using last year’s prices, costs and yields
Simple linear trend extrapolation of historical prices, costs and yields
Using assumptions made by others
Econometric Model Approach
?Capturing future
supply/demand impacts on prices and unit costs
Linkages to commodity policy
Linkages to domestic economy
Linkages to the global economy
2000 2001 2002 2003 2004 2005 2006
Timeline Required for Capital Budgeting…
Assume it is the year 2000 and John Deere wants to project farm machinery and equipment sales over the next six years to determine if plant expansion is necessary.
Capital budgeting models of investment decisions require projections of the annual farmfarm revenue and cost values over the entire 2001 to 2006 time period.
ConclusionsEconometric models are preferred over
naïve models and linear time trend models.
Much more accurate.Provide much more information (e.g.,
elasticitieselasticities).Allow for sensitivity analysissensitivity analysis with
independent (exogenous) variables when evaluating potential variabilitypotential variability about expected trends.
23 Key Terms to Know
Some Key TermsSome Key Terms
1. Three types of liquidity (HO #1)2. Solvency (HO #1)3. Debt repayment capacity (HO #1)4. Explicit and implicit cost of capital (HO #5)5. Optimal capital structure (HO #1,5)6. Historical and comparative analysis (HO #1)7. Long run planning curve (HO #2)8. Financial risk (HO #2,5)9. Payback period (HO #3)10.Internal rate of return (HO #3)
More Key TermsMore Key Terms
11.Economic life (HO #3)
12.Terminal value (HO #3)
13.Pro forma analysis (HO #4)
14.Structural econometric simulation (HO #4)
15.Coefficient of variation (HO #5)
16.Required rate of return (HO #5)
17.Business risk premium (HO #5)
18.Financial risk premium (HO #5)
More Key TermsMore Key Terms
19.Leverage (HO #1 and #5)
20.Portfolio effect (HO #5)
21.Negatively correlated cash flows (HO #5)
22.Weighted average cost of capital (HO #5)
23.Capital budget constraint (HO #5)