SRT510 Business Case Studies

Financial Statements: Introduction to the Balance Sheet

Financial Statements

The Big Three: Balance Sheet

Snapshot of what company owns & owes Income Statement

Net Income (= revenue – expenses) Cash Flow Statement

Where cash comes from and where it goesNB: We are not going to discuss this in any

detail

Financial Statements

Why do we care? Understand financial “health”

Diagnose illsPrescribe useful remediesAnticipate financial consequencesMeasure Investment (in IT) ToleranceAvoid severe illness & “death”

Some Definitions

Fixed Assets:Long-term tangible material goods that a

business owns and uses in the production of its income.

Fixed assets are not expected to be consumed or converted into cash for at least a year.

Examples: buildings, real estate, equipment, furniture

Some Definitions

Accounts Receivable (A/R):“If a company has receivables, this means it has made a sale but has yet to collect the money from the purchaser. Most companies operate by allowing some portion of their sales to be on credit.

These type of sales are usually made to frequent or special customers who are invoiced periodically, and allows them to avoid the hassle of physically making payments as each transaction occurs. In other words, this is when a customer gives a company an IOU for goods or services already received or rendered.”

(http://investopedia.com/terms/a/accountsreceivable.asp)

Examples?

Some Definitions

Accounts Payable (A/P):“Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company.”

(http://www.investorwords.com/51/accounts_payable.html)

Examples?

Foundation Of All Accounting

Assets = Liabilities + Shareholder’s Equity (SE)

SE = Assets – Liabilities

SE = “what you own” – “what you owe”

SE = “value of the shareholders’ investment in the company”

Foundation Of All Accounting

SIMPLE EXAMPLE: In 2009: You buy a $260,000 car (

2006 Ferrari F430 Spider F1) . You put $60K down and take a car loan for $200K

You have $260K in assets, $200K in liabilities and $60K in SE

If you pay off $50K in one year, and your car increases in value (that model is in demand) to $300K then you have $300K in assets, $150K in liabilities and $150K in SE

Foundation Of All Accounting

SAME EXAMPLE, a bit more complex: You can’t afford the car on your own so you buy it with a

(wealthy) aunt. You decide on a 60/40 split. In 2009: You & your aunt buy the $260,000 car, putting

$160K down--$156K (60% of $260K) from your aunt, $4k from you. You also take a car loan for $100K

Together, you have $260K in assets, $100K in liabilities and $160K in SE

Individually: your aunt has $156K in assets, $0 in liabilities, and $156K in SE you have $104K in assets, $100K in liabilities and $4K in SE

Cash Flow-Production Cycle

Cash

A/RFixed

Assets

Inventory

Production ($ are used to create inventory—raw materials, salaries, etc.)

Investment ($ used to purchase fixed assets)

Depreciation (fixed assets are used up as inventory is created)

Taxes, dividendsPayments towards liabilities(loans, A/P)

Cash Flow-Production Cycle

Cash

A/RFixed

Assets

Inventory

cash sales

credit sales (sales in which $ are not paid right away; e.g. perhaps within 30 days. Note: this typically does NOT include 3rd party credit card (e.g. VISA) sales.)

Collection (customers who bought on credit, pay what they owe)

Money Borrowed (Loans)

Cash Flow-Production Cycle

Cash

A/RFixed

Assets

Inventory

Production cash sales

Investment

Depreciation credit sales

Collection

Taxes, dividends, liability paymentsLoans

Assets Or Liabilities?

Asset Liability

Cash

Fixed Asset

Inventory

A/R

A/P

Loan

TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)

Analysis for Financial management, Higgins, 8e

TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)

Analysis for Financial management, Higgins, 8e

TABLE 1-1 Worldwide Sports Financial Transactions 2005 ($ thousands)

Analysis for Financial management, Higgins, 8e

TABLE 1-2 Harley-Davidson, Inc. Balance Sheets ($ millions)TABLE 1-2 Harley-Davidson, Inc. Balance Sheets ($ millions)

Change in

2003 2004 Account

AssetsCash 329.3$ 275.2$ (54.1)$ Marketable securities 993.3 1,336.9 343.6 Accounts receivable, less reserve for possible losses 1,114.4 1,328.4 214.0 Inventories 207.7 226.9 19.2 Prepaid income taxes 51.2 60.5 9.3 Other current assets 33.2 38.3 5.1

Total current assets 2,729.1 3,266.2

Property, plant, and equipment 2,191.2 2,193.4 2.2 Less accumulated depreciation and amortization 1,144.9 1,168.7 23.8

Net property, plant, and equipment 1,046.3 1,024.7 (21.6)

Finance receivables, net 735.9 905.2 169.3

Goodwill 53.7 59.5 5.8 Other assets 358.1 227.7 (130.4)

Total assets 4,923.1$ 5,483.3$

December 31

Analysis for Financial management, Higgins, 8e

TABLE 1-2 (Continued)TABLE 1-2 (Continued)

Liabilities and Shareholders' EquityLong-term debt due in one year 324.3$ 495.4$ 171.1 Accounts payable 223.9 244.2 20.3 Income taxes payable 54.8 53.5 (1.3) Accrued expenses 197.2 197.1 (0.1) Other current liabilities 155.6 182.4 26.8

Total current liabilities 955.8 1,172.6

Long-term debt 670.0 800.0 130.0

Postretirement healthcare benefits 127.4 149.8 22.4 Deferred income taxes 125.8 51.4 (74.4) Other long-term liabilities 86.3 90.8 4.5

Total liabilities 1,965.3 2,264.6

Common stock 3.3 3.3 Additional paid-in capital 419.5 533.1 Retained earnings 3,121.2 3,832.5 Less treasury stock (586.2) (1,150.4)

Total shareholders' equity 2,957.8 3,218.5 260.7

Total liabilities and shareholders' equity 4,923.1$ 5,483.1$

Analysis for Financial management, Higgins, 8e