Lecture cp2 no2.ppt
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Transcript of Lecture cp2 no2.ppt
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Contemporary Engineering Economics, 4th
edition. 2007 1
Understanding the Financial
Statements
Lecture No.2
Chapter 2
Contemporary Engineering Economics
Copyright 2006
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Contemporary Engineering Economics, 4thedition. 2007 2
Understanding Financial Statements
Accounting: TheBasis of Decision-
Making Financial Statements:
Financial Status forBusinesses
Financial Ratios:Using Ratios to MakeBusiness Decisions
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Contemporary Engineering Economics, 4thedition. 2007 3
Chapter Opening StoryDell Computer
Corporation 1983Michael Dell starts business of preformatting IBM PC
HDs on weekends 1985 - $6 million sales, upgrading IBM compatibles for local
businesses 1986 - $70 million sales; focus on assembling own line of PCs
1990 - $500 million sales with an extensive line of products 1996Dell goes online; $1 million per day in online sales; $5.3B
in annula sales 1997Dell online sales at $3 million per day; 50% growth rate
for third consecutive year, 7.8B in total annual sales
2005 - $49.2 B in sales
How would you evaluate the financial performance ofDell Corporation?
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Contemporary Engineering Economics, 4thedition. 2007 4
A. Why Engineers need to understand the financial
statements?
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Contemporary Engineering Economics, 4thedition. 2007 5
AccountingThe Language of Business
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Contemporary Engineering Economics, 4thedition. 2007 6
Financial Status for Business
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Contemporary Engineering Economics, 4thedition. 2007 7
B. Understanding the Balance Sheet
1. The basic accounting equation and thedefinition of capital
2. How to instantly determine liquidity and too
much debt
3. How the firm gets equity: only two ways
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Contemporary Engineering Economics, 4thedition. 2007 8
The Basic Accounting Equation
For the Balance Sheet Presentation
For the Financial Analysis
Assets - Liabilities = Owners Equity
Assets = Liabilities + Owners Equity
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Contemporary Engineering Economics, 4thedition. 2007 9
How Items Are Arranged on the Balance
Sheet
AssetsLiabilities
Owners
Equity
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Contemporary Engineering Economics, 4thedition. 2007 10
Using the Four Quadrants of the Balance
Sheet and Why?
ASSETS LIABILITIES
CurrentAssets
Long-Term Assets
CurrentLiabilities
Long-Term Liabilities
Equity
=
1. Owner Contributions
2. Retained Earnings
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Contemporary Engineering Economics, 4thedition. 2007 11
CurrentAssets
Long-term
Assets
Current
Liabilities
Long-term Liabilities
Equity
The Balance Sheet StatementDell Computer
Corporation
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Contemporary Engineering Economics, 4thedition. 2007 12
How to Instantly Determine Liquidity and
Too Much Debt?
Liquidity
Too Much Debt?
Current Ratio (2:1)
Debt To Equity Ratio
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Contemporary Engineering Economics, 4thedition. 2007 13
LiquidityCurrent Ratio
ASSETS LIABILITIES
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Liabilities
Equity1. Owner Contributions
2. Retained Earnings
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Contemporary Engineering Economics, 4thedition. 2007 14
Too Much Debt?Debt to Equity Ratio
ASSETS LIABILITIES
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Liabilities
Equity1. Owner Contributions
2. Retained Earnings
Debt
Equity
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Contemporary Engineering Economics, 4thedition. 2007 15
How the Firm Gets Equity: Only Two
Ways
Owners Contributions
By issuing stocks through financial markets
Retained Earnings
By retaining operating profits instead of paying
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Contemporary Engineering Economics, 4thedition. 2007 16
1. How to Use profit check points
2. Why gross margin is the critical measure
for engineers?3. How does inventory production impact
profit?
C. Using the Income Statement to Manage
a Business
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Contemporary Engineering Economics, 4thedition. 2007 17
Basic Income Statement Equation
Revenue
Expenses
Net Income (Loss)
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Contemporary Engineering Economics, 4thedition. 2007 18
Why Gross Margin is the Critical Measure
for Engineers?
Sales
Cost of Goods Sold
Gross Margin
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Contemporary Engineering Economics, 4thedition. 2007 19
How Inventory Production Impacts Profit
Calculating the Cost of Goods Sold
Beginning Inventory
+ Additions to Inventory
- Ending Inventory
Cost of Goods Sold
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Contemporary Engineering Economics, 4thedition. 2007 20
How to Use Profit Check PointsABC Company, Inc.
Statement of Operations(Year Ended December 31, 200x)
Sales $5,000,000 100.0%
Less: Cost of Goods Sold 3,250,000 65.0%
Gross Profit 1,750,000 35.0%
Less: Selling, G&A Expenses 1,000,000 20.0%
Operating Profit 750,000 15.0%
Less: Interest 250,000 5.0%
Net Income Before Taxes (NIBT) 500,000 10.0%
Less: Taxes 175,000 3.5%
Net Income $325,000 6.5%
Bottom line
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Contemporary Engineering Economics, 4thedition. 2007 21
The Income StatementDell Computer
Corporation
18.32%
8.65%
6.18%
18.32%
100.00%
Gross margin
Operating margin
Net margin
FY 2005
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Contemporary Engineering Economics, 4thedition. 2007 22
1. The business operating cycle: Howa business earns its cash
2. Sources and Uses of Cash3. The engineers focus on the
investing section: Capital Budgeting
D. Understanding the Statement of Cash
Flows
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Contemporary Engineering Economics, 4thedition. 2007 23
Shareholders
Fixed Assets
Debt holders
Inventory
Government
Customers
CASHFrom cash sales
To pay taxes
From credit
sales To pay labor,materials, andoverhead
To pay interestand principal
From saleof debt
To purchase
From sale
To pay dividend,To purchase backshares
From saleof shares
Cash Flow Transactions within Business
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Contemporary Engineering Economics, 4thedition. 2007 24
The Cash FlowBusiness Cycle
Inventory
Production
Cash
Accounts
receivable
Fixed assets
CashSales
Credit
Sales
Collection of
receivable
Investment
Depreciation
Changes in equityChanges in liabilities
Pay taxesPay interestPay dividends
LaborMaterials
Overhead
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Contemporary Engineering Economics, 4thedition. 2007 25
The Cash Flow StatementDell Computer Corporation
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