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Day 2 Financial Reporting & Forecasting Review of Accounting Financial Statements, Cash Flows & Taxes Day 2 Outline Know the financial statements and where can be found o o o o o Income Statement Price-earnings Ratio Balance Sheet Statement of Cash Flows Tax-free Investments (Depreciation) Financial forecasting in a firm’s strategic growth o Three financial statements o Percent-of-sales method o Methods to determine the amount of new funds required in advance o Factors that affect growth Basic Financial Statements (1) Income statement The income statement measures the income generated in the period and the resources used up in generating that income [P&L] (2) Balance Sheet & Statement of Retained earnings The balance sheet shows the assets of a company at a specific point in time, and how those assets are funded (3) Cash flow The cash flow statement shows where cash comes from during the period....and how it is spent 2. Sources of Information • Annual reports • Wall Street Journal • Internet – – – – NYSE (www.nyse.com) Nasdaq (www.nasdaq.com) Text (www.mhhe.com) Company’s Site • SEC – EDGAR – 10K & 10Q reports Income Statement Multiple Step Structure Sales – Cost of Goods Sold (COGS) = Gross Profit (GP) GP – Expenses = Earnings Before Interest and Taxes (EBIT) or Operating Income (OI) EBIT – Interest = Earnings Before Taxes (EBT) EBT – Taxes = Earnings After Taxes (EAT) or Net Income (NI) Note: NI in corporations is partially distributed to shareholders in the form of dividends and remaining kept in corporations as reserve (Retained Earnings) for financing future growth Income Statement (cont’d) Balance Sheet Items • Liquidity: Asset accounts are listed in order of liquidity – Current assets • Items that can be converted to cash within one year – Marketable securities • Temporary investments of excess cash – Accounts receivable • Allowance for bad debts to determine their anticipated collection value – Inventory • Includes raw materials, goods in progress, or finished goods Balance Sheet Items (cont’d) – Prepaid expenses • Represent future expense items that are already paid for – Investments • Long-term commitment of funds (at least one year) • Includes stocks, bonds, or investments in other corporations – Plant and equipment • Carried at original cost minus accumulated depreciation • Accumulated depreciation: Sum of past and present depreciation charges on currently owned assets Balance Sheet Items (cont’d) – Total assets: Financed through liabilities or stockholders’ equity • Liabilities are financial obligations of the firm and move from current liabilities (due within one year) to longerterm obligations • Short-term obligations – Accounts payable (amount owed on open account to suppliers) – Notes payable (short-term signed obligations – to the banker or other creditors) – Accrued expense (payment not made for the obligation incurred on the services received) Stockholder’s Equity • Represents total contribution and ownership interest of preferred and common stockholders – Preferred stock – Common stock – Capital paid in excess of par – Retained earnings Statement of Financial Position (Balance Sheet) Statement of Retained Earnings (a short supplement to the income statement) • Indicates disposition of earnings with: – any adjustments to previously reported income – any restrictions on cash dividends Sections of a Statement of Cash Flows • Emphasizes critical nature of cash flow to the operations of the firm • Three primary sections of the statement of cash flows: – Cash flows from operating activities – Cash flows from investing activities – Cash flows from financing activities • The results of three sections are added together to compute the net increase or decrease in cash flow Concepts Behind the Statement of Cash Flows Overall Statement Combining the Three Sections Free Cash Flow Free Cash Flow = Cash flow from operating activities – Capital expenditures – Dividends – Capital expenditures • Maintain productive capacity of firm – Dividends • Maintain necessary payout on common stock and to cover any preferred stock obligations • Free cash flow is used for special financing activities – Example: leveraged buyouts Connections among the Financial Statements The AKP SA example Earnings is the connecting element in Financial Statements Cash flow items in the Income Statement and various changes in cash items in the Balance Sheet are constituent elements of a firm’s cash flow statement. Unlike the balance sheet and income statement, cash flow statements are independent of accounting methods Taxes • The one thing we can rely on with taxes is that they are always changing • Consequently, it is important to keep up with the changing tax laws and to utilized specialists in the tax area when making decisions where taxes are involved. • Marginal vs. average tax rates – Marginal – the percentage paid on the next dollar earned – Average – the tax bill / taxable income • Other taxes Using Financial Ratios •Calculating ratios is pointless unless they are compared with some appropriate benchmarks. •Remember; The use of ratios alone provide very little information and may be misleading •With that in mind, a firm’s performance needs to be examined related to: • The aggregate economy • Its industry or industries • Its major competitors within the industry • Its own past performance (time-series analysis) • Its own short & long term goals Categories of Financial Ratios •Despite the large number of ratios available, the most commonly used are organized in six categories as follows: •1) Liquidity Measurement Ratios Current Ratio - Quick Ratio - Cash Ratio - Cash Conversion Cycle •2) Profitability Indicator Ratios Profit Margin Analysis - Effective Tax Rate - Return On Assets – Return On Equity - Return On Capital Employed •3) Debt Ratios Overview Of Debt - Debt Ratio - Debt-Equity Ratio - Capitalization Ratio – Interest Coverage Ratio - Cash Flow To Debt Ratio •4) Operating Performance Ratios Fixed-Asset Turnover - Sales/Revenue Per Employee - Operating Cycle •5) Cash Flow Indicator Ratios Operating Cash Flow/Sales Ratio - Free Cash Flow/Operating Cash Ratio – Cash Flow Coverage Ratio - Dividend Payout Ratio •6) Investment Valuation Ratios Per Share Data - Price/Book Value Ratio - Price/Cash Flow Ratio – Price/Earnings Ratio - Price/Earnings To Growth Ratio - Price/Sales Ratio - Dividend Yield Enterprise Value Multiple The Quality of Financial Statements • A basic assumption in Ratio Analysis is that: Financial statements have build-in quality and they reflect reality. • Recall: High-quality balance sheets must have – Conservative use of debt – Assets with market value greater than book – No liabilities off the balance sheet • High-quality income statements – Reflect repeatable earnings – Gains from nonrecurring items should be ignored when examining earnings – High-quality earnings result from the use of conservative accounting principles that do not overstate revenues or understate costs The Financial Planning Concept The concept 1. Ability to plan ahead establishing performance targets, and make necessary adjustments before actual events occur 2. Financial Planning is a dynamic process considering Risktaking desires & Ability to hedge against them, following a cycle of • • • making plans, implementing them, and revising them in the light of actual results. 3. Financial Planning is a coherent process aligned with the firm’s Strategic plans 4. Financial Planning has always a well defined time horizon 5. Forecasting the firm’s pro –forma statements (B/S, P/L, CF), and estimating the implied need for external financing, relying on historical data contained in the firm’s Financial Statements The Financial Planning Purpose The purpose: The primary purpose of financial planning is to determine: 1) whether the firm can realistically raise the necessary funds to Finance its operating plans Finance its major investment plans including working capital and fixed assets Finance acquisition plans and pay dividends and 2) the sources of the funds required such as: Retained Earnings Borrowing New equity A combination of them Constructing Pro Forma Statements Pro forma, or projected, financial statements enable a firm to estimate its future level of receivables, inventory, payables, as well as its anticipated profits and borrowing requirements. These statements are often required by bankers and other lenders as a guide for the future. A systems approach to develop pro forma statements consists of: • Constructing income statement based on sales projections and the production plan • Translating it into a cash budget • Assimilating all materials into a pro forma balance sheet The Sales Forecast • Very simple or very sophisticated forecasting techniques may be used, including correlation analyses, time series and trend analyses etc) • Information for sales forecasts may come from salesmen and related marketing functions, from external specialists, from internally developed models, industry trade groups etc • Often times econometric applications are used in conjunction with field information (sales composite method) Cash Budget • Mandatory tool in short-term financial planning – Helps to identify short-term needs timely enabling to take precautions and exploit potential opportunities • How it works – Pro forma income statement must be translated into cash inflows by defining sales and cash collections from all activities of a firm – Identify all cash outflows necessary to operations – More precise time frames set to help anticipate patterns of cash inflows and outflows (usually monthly intervals) – Subtract cash outflows from cash inflows and determine investing and financing needs in terms of amounts and time Pro Forma Balance Sheet • Represents the cumulative changes over time – Important to examine the prior period’s balance sheet – Some accounts will remain unchanged, while others will take new values • Information is derived from the pro forma income statement and cash budget The Financial Planning Process • The Percent-of-Sales Method is based on the assumption that: Accounts on the balance sheet will maintain a given percentage relationship to sales ST Notes payable, LT Loans, common stock, and retained earnings do not maintain a direct relationship with sales volume Thus it is assumed that borrowing (short & long term), and owner’s equity remain unchanged and only current liabilities are affected (spontaneous liability accounts). Regarding R/E they will change by the net Income less dividend. Hence percentages are not computed Illustrating the Financial Planning Process Steps for constructing Pro-Forma Financial Statements (The Percent-of-Sales Method) (i) The Sales Forecast • The starting point is collection of the historical sales data contained in the firm’s Income Statements covering usually a time horizon of ten years. • Let’s assume that sales volume in BLUE MOUNTAIN SA for 2009 were $ 2.290, the annual rate of growth between the years 2000 and 2009 was 8% and the assignment is to estimate 2010 sales volume based on this percentage growth rate. Applying this 8% growth rate to 2009 sales of $2.290 we calculate the 2010 sale estimate to be ~$2.500, ($2.290 * 1.08) The Financial Planning Process ILLUSTRATION OF STEP (I) BLUE MOUNTAIN SA Income Statement For the Year Ended Dec. 31, 2009 ($ 000's) & projected volume of 2010 sales P/L Key Positions 2009 SALES 2.290,00 OPERATING EXPENSES 1,758,00 DEPRECIATION 200,00 OPERATING INCOME BEFORE TAX 332,00 TAXES @ 40% 133,00 NET INCOME AFTER TAX 199,00 DIVIDEND (Dividend Pay-out 30% - $59,70/139,30) RETAINED EARNINGS 59,70 139,30 2009 % +8% 2010 2,500,00 Illustrating the Financial Planning Process Percent-of-Sales Method (ii) The level of Expenses projected in support of forecasted sales volume Express historical expense positions in the Income Statement as a percentages to sales (same year) Multiply percentages defined above with the new sales level forecasted for constructing multiple step pro-forma income statement It is assumed (1) no changes in operating strategies from previous periods (2) selected accounts contain no fixed components (ie if sales equal zero then selected accounts have zero balances-This paradox is relaxed when regression analyses are used) The Financial Planning Process ILLUSTRATION OF STEP (II) BLUE MOUNTAIN SA Pro-Forma Income Statement For the Year Ended Dec. 31, 2010 ($ 000's) P/L Key Positions 2009 2009 % 2010 SALES 2.290,00 100,00% 2,500,00 OPERATING EXPENSES 1,758,00 76,70% 1.917,50 DEPRECIATION 200,00 8,8% 220,00 OPERATING INCOME BEFORE TAX 332,00 14,5% 362,50 TAXES @ 40% 133,00 - 145,00 NET INCOME AFTER TAX (NI) 199,00 8,7% 217,50 DIVIDEND (Dividend Pay-out 30% - $59,70/139,30) RETAINED EARNINGS 59,70 65,25 139,30 152,25 Illustrating the Financial Planning Process Percent-of-Sales Method (iii) The level of asset required to support forecasted sales Convert historical positions in the Balance Sheet (B/S) to percentages by expressing all B/S accounts/positions as a percentage of sales (same year) Then Multiply the percentages defined above with the new sales level forecasted for constructing the pro-forma Balance Sheet Recall that percentages are not computed for ST Notes payable, LT Loans, common stock, and retained earnings. It is assumed The company operates in full capacity The Financial Planning Process ILLUSTRATION OF STEP (III) BLUE MOUNTAIN SA Pro-Forma Balance Sheet For the Year Ended Dec. 31, 2010 ($ 000's Assets Cash and Equivalents* Accounts Receivable Inventory Prepaid Expenses Total Current Assets Net Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable** Other Current Liabilities Short-term Notes Payable Total Current Liabilities Long-term Debt Total L.T Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity 2,009 186.00 198.00 250.00 20.00 654.00 2,340.00 102.50% 2,994.00 131.10% 2010 202.50 217.50 272.50 22.50 715.00 2,562.50 3,277.50 200.00 68.00 30.00 298.00 1,000.00 1,000.00 500.00 1,196.00 1,696.00 2,994.00 8.80% 3.00% 0.00% 11.80% 0.00% 0.00% 0.00% n/a% 108.98% 105.99% 220.00 75.00 30.00 325.00 1,000.00 1,000.00 500.00 1,348.25 1,848.25 3,173.25 Example * 186/2,290=~8.1% & 2,500 X 8.1% = 202.50 Example ** 200/2,290=~8.8% & 2,500 X 8.8% = 220.0 2009% 8.10% 8.70% 10.90% 0.90% 28.60% The Financial Planning Process (iv)The external financing need for the firm’s operating activities THE RULE •IF ASSETS > LTL & EQTY = NEEDS EXTERNAL FINANCING (SHORTAGE IS COVERED BY LOANS AND/OR NEW EQUITY) •IF ASSETS < LTL & EQTY = NO NEED FOR EXTERNAL FINANCING. (SURPLUS IS ADDED BACK TO CASH EQUIVALENTS) Based on the findings in previous steps it seems that the Additional external financing needs will total to $104,25T as presented in the table below: Selected key B/S & P/L positions ($000) 2009 2010 1) Total Assets 2.994,00 3.277,50 2) Total Liabilities & Owner’s Equity 2.994,00 3.173,25 External Financing Needs (EFN) (1-2) 104,25 The Financial Planning Process Alternatively EFN can be estimated following a simple formula: EFN = [(A/S*(ΔS)] – [L/S *(ΔS) + (M)*(St)*(1-D)] Where: 1) 2) 3) 4) 5) 6) Asset to Sales Historical Relationship (A/S ) Spontaneous Liabilities to Sales Historical Relationship (L/S) Absolute change in Sales Volume (Forecast less historical) (ΔS) Total Sales Volume Forecasted for the year (St) Forecasted Profit Margin (M) Forecasted Dividend Pay Out ratio (D) OR EFN = [(1,31*210)] – [(0,118*210) + (0,087)*(2.500,00)*(1-0,3)]and EFN = $104,25 The Financial Planning Process What to do next ? Seek for the proper financing sources: • To borrow from a bank or better off, negotiate trade terms to extend credit from suppliers (‘free capital’) • Alternatively consider leasing possibilities and/or equity financing Asset Management • Reduce investment in current and fixed assets • Rationalize Receivables and Inventories (Decrease DSO and DIH) Control growth rate • Lower growth rates (say 5%) will require less asset investment • Increase profit margin higher (say 12%) than the firm’s historical margin Growth and External Financing • At low growth levels, internal financing (retained earnings) may exceed the required investment in assets • As the growth rate increases, the internal financing will not be enough and the firm will have to go to the capital markets for money • Examining the relationship between growth and external financing required is a useful tool in longrange planning The Internal Growth Rate • The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing. • Using the information from BLUE MOUNTAIN SA ROA = $199 / $2,994= 0.066 Retention (D)=($199-$59) /$199 =0.70 Internal Growth Rate ROA D 1 - ROA D [$199 / $2,994] *{[$ 199 $59] / $199} {1 [$199 / $2,994] * [$199 $59] / $199} [0.066 * 0.70] /{1 [0.066 * 0.70} 0.0464 / 0.953 0.0487 4.87% Thus BLUE MOUNTAIN SA could grow at 4.87% relying solely on internally generated funds without raising additional external capital. (increase in debt) The Sustainable Growth Rate • The sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio. • Using the information from BLUE MOUNTAIN SA ROE = $199 / ($1,196+$500)= 0.1173 Retention (D) =($199-$59) /$199 =0.70 ROE D 1 - ROE D 0.1173 0.70 {1 (0.1173 0.70)} 0.0821 / 0.91789 0.08945 Sustainabl e Growth Rate 8.95% The sustainable growth rate 8.95% for BLUE MOUNTAIN SA is substantially higher than its internal growth rate. This is because we are allowing the company to issue debt as well as use internal funds. (Note that no new equity is issued) Determinants of Growth • Profit margin – operating efficiency • Total asset turnover – asset use efficiency • Financial leverage – choice of optimal debt ratio • Dividend policy – choice of how much to pay to shareholders versus reinvesting in the firm It is important to note at this point that growth is not the goal of a firm in and of itself. Growth is only important so long as it continues to maximize shareholder value. End of Day 2 Shokran” Thank You “ • DAY 2 Appendix A The Financial Planning Process – An illustration for constructing Pro Forma Fin. Statements Development of Pro Forma Statements Pro Forma Income Statement • Provides a projection on the anticipation of profits over a subsequent period • Four important steps include: • Establishing a sales projection • Determining production schedule and the associated use of new material, direct labor, and overhead to arrive at gross profit • Computing other expenses • Determining profit by completing actual pro forma statement The Sales Forecast • Very simple or very sophisticated forecasting techniques may be used, including correlation analyses, time series and trend analyses etc) • Information for sales forecasts may come from salesmen and related marketing functions, from external specialists, from internally developed models, industry trade groups etc • Often times econometric applications are used in conjunction with field information (sales composite method) Establish a Sales Projection • Let us assume Goldman Corporation has two primary products: wheels and casters and projects the following sales volumes and selling prices for the period in question (6 months) Table 4-1 Determine a Production Schedule and the Gross Profit • Number of units produced will depend on: – Beginning inventory – Sales projections – Desired ending inventory • To determine the production requirements: Units + Projected sales + Desired ending inventory – Beginning inventory = Production requirements Stock of Beginning Inventory Suppose that Goldman Corporation has available in stock (beginning inventory) with their corresponding unit costs, the items shown in the Table below Table 4-2 Production Requirements for Six Months Suppose also that Goldman Corporation has estimated its production requirements as shown in table below. Table 4-3 New Unit Production Costs • Assume further that due to price increases in raw material unit costs to produce each unit is increased by $2 thus costing Goldman Corporation $18/unit for wheels and $22/unit for Casters as shown in the table below : Table 4-4 Total Production Costs for the Period in Question Given the qty needed to be produced per product and the unit cost per product, we can get the total cost estimates as given in the table below: Table 4-5 Cost of Goods Sold Estimates Costs associated with units sold during the time period Assumptions for the illustration: • Beginning inventory is assumed to be sold first • First allocates the cost of current sales to beginning inventory • Then to goods manufactured during the period Allocation of Manufacturing Cost and Determination of Gross Profits Table 4-6 Valuing Ending Inventory Given the values of the beginning inventory, the total cost of production for the period in question and the cost of sales for same period, then we can get the value of the ending inventory as shown in the table below. Table 4-7 Other Expense Items Suppose also that Goldman Corporation has estimated its other expenses to be; $12,000 for SG&A, $1,500 for Interest expenses, Corporate taxes are at 20%, dividend pay out approximately 3%, then the pro-forma income statement will be structured as follows: Subtracted from gross profits the General and administrative expenses to arrive at EBIT Subtracted from EBIT the interest expenses to arrive at EBT Subtracted from EBT the income taxes to arrive at EAT Subtracted from EAT the dividend pay out of 3% to arrive at Retained Earnings Pro Forma Income Statement Using the information gathered so far, the pro-forma Income statement will be as follows: Table 4-8 Cash Budget • Mandatory tool in short-term financial planning – Helps to identify short-term needs timely enabling to take precautions and exploit potential opportunities • How it works – Pro forma income statement must be translated into cash inflows by defining sales and cash collections from all activities of a firm – Identify all cash outflows necessary to operations – More precise time frames set to help anticipate patterns of cash inflows and outflows (usually monthly intervals) – Subtract cash outflows from cash inflows and determine investing and financing needs in terms of amounts and time Monthly Sales Pattern & Cash Receipts Sales Pattern Suppose that Goldman Corporation’s SALES in December were $12,000 and based on the sales trends of the past has estimated its sales pattern for the first half of the year as shown in table below. Table 4-9 Cash Receipts: Suppose also that a careful analysis of past sales and collection records show that 20% of the monthly sales is collected within same month and the remaining80% in the following month as shown in the table below Table 4-10 Avg Monthly production Costs Pattern & Cash Payments Suppose that Goldman Corporation’s Material Purchases in December were $4,500 and material, labor and overhead costs are incurred on an equal monthly basis over the projected six-month period as shown in table below. Note also that Payment for material is made the following month in full after purchases have been made, whereas Labor & Overhead costs are paid in same month. Table 4-12 Summary of All Monthly Cash Payments Suppose also that a careful analysis of past performance in expenditure records show that Disbursements for general and administrative expenses ($12,000) are equally distributed over the six month period, Interest payments ($1,500) are due in June, dividends pay ($1,500) are due in June every year and taxes are paid quarterly in two equal installments. Also $8,000 in Feb plus $10,000 in June to be expensed for new equipment Table 4-13 Cash Budget Monthly Ending Cash Flow • Difference between monthly receipts and payments is the net cash flow for the month – Allows the firm to anticipate the need for funding at the end of each month Table 4-14 Pro Forma Balance Sheet • Represents the cumulative changes over time – Important to examine the prior period’s balance sheet – Some accounts will remain unchanged, while others will take new values • Information is derived from the pro forma income statement and cash budget Development of a Pro Forma Balance Sheet “Prior” Balance Sheet for the year ended DECEMBER 31, 2010 Table 4-16 Pro Forma Balance Sheet Table 4-17 Explanations of Pro Forma Balance Sheet Cash ( $5,000 )—Assume minimum cash balance as shown in “prior’ B/S. Marketable securities ( $3,200 )—remains unchanged from prior period’s value in Table 4–16 Accounts receivable ( $16,000 )—based on June sales of $20,000 in Table 4–10 (80% of current month sales become accounts receivables) Inventory ( $6,200 )—ending inventory as shown in Table 4–7. Plant and equipment ( $27,740+ $18,000) $45,740 Accounts payable ( $5,732 )—based on June purchases in Table 4–13 Notes payable ( $5,884 )—the amount that must be borrowed to maintain the cash balance of $5,000, as shown in Table 4–15 Long-term debt ( $15,000 )—remains unchanged from prior period’s value in Table 4–16 Common stock ( $10,500 )—remains unchanged from prior period’s value in Table 4–16 Retained earnings ( $39,024 )—initial value plus pro forma income ($20,500 + $18,524) Analysis of Pro Forma Statement The growth of $25,640 Total assets (June 30, 2011)……$76,140 Total assets (Dec 31, 2010)…….$50,500 Increase………………………………..$25,640 Was financed by: • accounts payable = $1,232 ($5732 – $4500) • notes payable, and profit = $5,884 ($5884 - $0), and • as reflected by the increase in retained earnings $18,524 The Rule determining the external financing needs (EFN) IF ASSETS > LIABILITIES & EQUITY = NEEDS EXTERNAL FINANCING IF ASSETS < LIABILITIES & EQUITY = NO NEED FOR EXTERNAL FINANCING & THE SURPLUS IS ADDED BACK TO CASH EQUIVALENTS BACK-UP NOTES 69 BACK-UP NOTES - 1 • Rules for Ratio interpretation • There can be an enormous large number of financial ratios, but knowing a few empirical rules can assist to remember the way of their calculation, and to interpret their meaning better. Basically each ratios name symbolizes and reveals the way to be calculated and the purpose it serves. • For example: – Ratios expressed as ‘margin’ imply that a B/S or P/L position needs to be divided by sales – Ratios expressed as ‘turnover’ imply that sales volume (or a variation of sales) needs to be divided by a B/S or P/L position. – Ratios expressed ‘return on’ imply that net income (or a variation of net income) needs to be divided by a B/S or P/L position. 70 BACK-UP NOTES - 2 • Use of Ratios in Constructing Fin. Statements • When sales volume and cash on hand can be determined with relative accuracy and pre-defined ratios on historical data are available, then the construction of both B/S & P/L can be accomplished • For example: • Given: Sales Volume $1.440 & Cash on Hand $40 and tax rate at 40% • Accompanied by: 1) DSO = 25 days 2) Gross Margin = 45% • 3) INVTURN = 12 times 4) ROA = 12% • 5) Quick Ratio = 2 times 6) TIE = 6 times • 7) Debt to Assets = 60% 8) Net Margin = 5% THEN continue 71 BACK-UP NOTES - 2 Use of Ratios in Constructing Fin. Statements (cont’d) P/L 1.Net Income after tax (NIAT) = Sales*Net Margin = OR NIAT $72 2.Net Income before tax (NIBT) = NIAT /(1-Tax Rate) = OR NIBT $120 3.Cost of Sales (COPS) = Sales-(Gross Margin*Sales)= OR COPS = $792 4.Interest expense (I) = TIE*I = EBIT & NIBT + I = EBIT = $120 = 4I= OR I=$30 5.EBIT= NIBT + I = OR EBIT = $150 6.Operating Expenses (OE) = Sales – COPS – EBIT= OR OE = $498 BACK-UP NOTES - 2 • Use of Ratios in Constructing Fin. Statements (cont’d) P/L 200X1 SALES $ 1’440 COPS 792 OE 498 EBIT $150 I 30 NIBT $120 TAX 48 NIAT $72 BACK-UP NOTES - 2 Use of Ratios in Constructing Fin. Statements (cont’d) B/S • • • • • • • • Total Assets = NIAT/ROA = Accounts Receivable = DSO*Sales per Day = Inventory = Sales/INVTURN = Current Liabilities = Cash + A/R/Quick Ratio = Long term Liabilities = Total Assets* Debt to Assets ratio = Owner’s Equity = Total Assets – Total Debt = Fixed Assets = Total Assets – Current Assets = Long Term Debt = Total LT Liabilities – Current Liabilities = OR $600 OR $100 OR $120 OR $70 OR $360 OR $240 OR $340 OR $290 BACK-UP NOTES - 2 • Use of Ratios in Constructing Fin. Statements (cont’d) B/S200X1 ASSETS Cash & Equivalent $4O A/R 100 Inventory 120 Net F/A 340 Total Assets $600 LIABILITIES & EQUITY Current Liabilities $70 LT Debt 290 Equities 240 Total Liab. & Equity $600 End