Multinational Business Finance 12th Edition Slides Chapter 01
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Make Your FinancialStatements Work for You
Christa Casey, CA
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Business owners & managers – Determine needs
– Past decisions
– Predict future
Banks, creditors & suppliers
– Extend credit
– Credit terms
Income tax authorities
Why you need financial
statements
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Financial Statements
Income Statement Balance Sheet
Cash Flow
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Income StatementFor year ended December 31, 2004
Sales – Product A $100,000Sales – Product B 200,000
Total sales 300,000
Cost of goods sold – Product A 20,000Cost of goods sold – Product B 100,000Total cost of goods sold 120,000
Gross profit 180,000
ExpensesWages 66,000Rent 24,000Office supplies 5,000
Vehicle 4,000Interest 3,000Depreciation 7,000
Total expenses 109,000
Income before taxes 71,000Income tax expense 14,200Net income $56,800
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Balance Sheet At December 31, 2004
AssetsCurrent Assets
Cash $ 100 Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000
152,100
Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000
Total Assets $215,100
LiabilitiesCurrent Liabilities
Bank loan $ 42,000 Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200
99,200
Long-Term Debt 56,000Total liabilities 155,200
EquityCapital stock 100
Retained earnings, opening 4,000Net income 56,800Less: Dividends 1,000Retained earnings, ending 59,800
Total equity 59,900Total liabilities & equity $215,100
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Capital Assets
Equipment purchased in yearCost $70,000
Useful life = 10 years
Depreciation expense = Cost / Useful life
$70,000 / 10 = $7,000
Net Book Value = Cost – Accumulateddepreciation
$70,000 – $7,000 = $63,000
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Balance Sheet At December 31, 2004
AssetsCurrent Assets
Cash $ 100 Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000
152,100
Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000
Total Assets $215,100
LiabilitiesCurrent Liabilities
Bank loan $ 42,000 Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200
99,200
Long-Term Debt 56,000Total liabilities 155,200
EquityCapital stock 100
Retained earnings, opening 4,000Net income 56,800Less: Dividends 1,000Retained earnings, ending 59,800
Total equity 59,900Total liabilities & equity $215,100
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Balance SheetSole Proprietorship
At December 31, 2004
Assets
Current AssetsCash $ 100
Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000
152,100
Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000
Total Assets $215,100
Liabilities
Current LiabilitiesBank loan $ 42,000
Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200
99,200
Long-Term Debt 56,000Total liabilities 155,200
Owner’s Equity
Owner’s equity, opening 4,100Net income 56,800Less: Draws 1,000Owner’s equity, ending 59,800
Total liab. & owner’s equity $215,100
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Balance SheetPartnership
At December 31, 2004
AssetsCurrent Assets
Cash $ 100 Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000
152,100
Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000
Total Assets $215,100
LiabilitiesCurrent Liabilities
Bank loan $ 42,000 Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200
99,200
Long-Term Debt 56,000Total liabilities 155,200
Owners’ EquityPartner A’s equity, opening 3,000Share of net income 28,400
Less: Draws 500Partner A’s equity, ending 30,900
Partner B’s equity, opening 1,100Share of net income 28,400Less: Draws 500
Partner B’s equity, ending 29,000
Total owners’ equity 59,900
Total liab. & owners’ equity $215,100
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Statement of Cash FlowsStatement of Cash Flows
Summary of cash inflows and outflowsfor a period of time
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Statement of Cash FlowsStatement of Cash Flows
Operating ActivitiesNet income $56,800
Depreciation expense 7,000Change in levels of: Accounts receivable (10,000 – 25,000) (15,000)Inventory (75,000 – 125,000) (50,000)Prepaid expenses (2,000 – 2,000) 0
Accounts payable (38,250 – 42,000) (3,750)
Sales taxes payable (4,750 – 5,000) (250)Income taxes payable (14,200 – 500) 13,700
Total operating activities 8,500
Investing Activities - Purchase of capital asset (70,000)
Financing Activities
Bank loan proceeds (42,000 – 35,900) 6,100Long-term debt proceeds, net of repayment 56,000
Total financing activities 62,100
Other – Dividends paid (1,000)
Decrease in cash (8,500 - 70,000 + 62,100 – 1,000) (400)Cash, beginning of year 500Cash, end of year $100
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How Daily Decisions AffectFinancial Statements
Borrowing
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Lease vs. Buy
Disadvantages of leasing – Hefty early termination penalties – Mandatory maintenance requirements
Advantages of leasing – Monthly payments are usually lower – Smaller down payment required
– Greater flexibility – Less obsolescence risk – Possible larger tax deductions
– Off-balance-sheet financing
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Income StatementFor year ended December 31, 2004
Sales – Product A $100,000Sales – Product B 200,000
Total sales 300,000
Cost of goods sold – Product A 20,000Cost of goods sold – Product B 100,000Total cost of goods sold 120,000
Gross profit 180,000
ExpensesWages 66,000Rent 24,000Office supplies 5,000
Vehicle 4,000Interest 3,000Depreciation 7,000
Total expenses 109,000
Income before taxes 71,000Income tax expense 14,200Net income $56,800
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Balance Sheet At December 31, 2004
AssetsCurrent Assets
Cash $ 100 Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000
152,100
Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000
Total Assets $215,100
LiabilitiesCurrent Liabilities
Bank loan $ 42,000 Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200
99,200
Long-Term Debt 56,000Total liabilities 155,200
EquityCapital stock 100
Retained earnings, opening 4,000Net income 56,800Less: Dividends 1,000Retained earnings, ending 59,800
Total equity 59,900Total liabilities & equity $215,100
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Lease vs. Buy
Debt-to-equity ratio Used by banks & creditors
= total liabilities 155,200
total equity 60,900
= 2.55
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Financing Short-Term
vs. Long-Term
How long to finance a loan for – When will you be able to pay it back
– What are you financing?
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Financing Long-Term
vs. Short Term
Current ratio (or working capital ratio) – Determines whether you are able to paydebts when they are due
= Current Assets $152,100
Current Liabilities $99,200
= 1.53
Should usually be at least 1
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Borrowing Requirements
Use your financial statements andforecasts to help you plan & makebetter decisions.
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How Daily Decisions AffectFinancial Statements
Managing Cash & Profit
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Statement of Cash Flow
Identifies where your cash came fromand where it went
Helps predict your future cash flows
Provides useful information that is noton income statement
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Statement of Cash Flow
Can answer common questions – Business is profitable, why is there no
cash?
– Why is there so much cash, if there is solittle profit?
Provides information about operating,investing and financing activities
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Liquidity
How quickly you can convert assets tocash
Cash is your most liquid asset
Working capital = current assets –current liabilities
= 152,100 – 99,200
= 52,900
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Where are you making
your money?
Track each product’s revenues &expenses separately
Compare gross margin percentages
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Where are you making
your money?
Product A Product BSales $100,000 $200,000
Cost of sales 20,000 100,000Gross Profit $ 80,000 $100,000
Gross Profit % 80% 50%
(Gross Profit / sales x 100)
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Planning & Forecasting
Long-run success = proper planning &financial controls
Past financial statements help predict
the future – Identifies trends
Certain expenses may be based onsales volume
Helps evaluate past decisions
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Comparative
Income StatementFor year ended December 31, 2004
2004 2003
Sales – Product A $100,000 110,000Sales – Product B 200,000 40,000Total sales 300,000 150,000
Cost of goods sold – Product A 20,000 25,000Cost of goods sold – Product B 100,000 24,000
Total cost of goods sold 120,000 49,000
Gross profit 180,000 101,000Expenses
Wages 66,000 67,000Rent 24,000 24,000
Office supplies 5,000 2,500 Vehicle 4,000 4,000Interest 3,000 1,000Depreciation 7,000 0
Total expenses 109,000 98,500
Income before taxes 71,000 2,500Income tax expense 14,200 5,00Net income $56,800 $2,000
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Common Size
Income StatementFor year ended December 31, 20042004 2003
Sales – Product A $100,000 $110,000Sales – Product B 200,000 40,000Total sales 300,000 150,000
Cost of goods sold – Product A 20,000 25,000Cost of goods sold – Product B 100,000 24,000
Total cost of goods sold 120,000 (40%) 49,000 (33%)
Gross profit 180,000 101,000Expenses
Wages 66,000 (22%) 67,000 (45%)Rent 24,000 (8%) 24,000 (16%)
Office supplies 5,000 (2%) 2,500 (2%) Vehicle 4,000 (1%) 4,000 (3%)Interest 3,000 (1%) 1,000 (1%)Depreciation 7,000 (2%) 0 (0%)
Total expenses 109,000 98,500
Income before taxes 71,000 2,500Income tax expense 14,200 (5%) 5,00 (0.3%)Net income $56,800 $2,000
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Planning & Forecasting
Long-run success = proper planning &financial controls
Past financial statements help predict
the future – Identifies trends
Certain expenses may be based onsales volume
Helps evaluate past decisions
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Quick FinancialStatement Reviews
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Cash Flow Problems
& Remedies
Accounts Receivable (A/R) The quicker you collect accounts
receivable, the more cash you have
The longer receivables remain uncollected,the least likely they are to be repaid
Use aged receivables list to stay in control
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Cash Flow Problems
& Remedies
Accounts receivable turnover= total credit sales
(beginning a/r + ending a/r)/2= 300,000
(10,000 + 25,000)/2= 17.14 times a year or every 21.3
days
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Cash Flow Problems
& Remedies
Accounts Payable & Debt Amounts owing to suppliers & banks can
often be reduced by controlling inventory
levels The longer you hold inventory before you
sell it, the less cash you have
Inventory turnover measures how fast yousell your inventory
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Cash Flow Problems
& Remedies
Inventory Turnover= cost of goods sold
(beginning + ending inventory) / 2= $120,000
(75,000 + 125,000) / 2= 1.2 times a year or every 304 days
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Cash Flow Problems
& Remedies
Accounts Payable & Debt Amounts owing to suppliers & banks can
often be reduced by controlling inventory
levels The longer you hold inventory before you
sell it, the less cash you have
Inventory turnover measures how fast yousell your inventory
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Ongoing Cash Flow
Monitor current assets against currentliabilities
Be sure to include the following incurrent liabilities:
– Portion of long-term debt due within
next year – Estimated income taxes payable or
instalments
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Ongoing Cash Flow
Be sure to reduce current assets bythe following:
– Accounts receivable not likely to be
collected from customers
– Obsolete or damaged inventory not likely
to be sold Ensure you have enough liquid assets
to pay off liabilities
Prepare monthly cash flow statement
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Monthly Cash Flow
StatementJanuary February March
Cash in bank (shortfall) 100 (11,675) 2,550
RevenueSales - Product A 8,500 7,500 7,500Sales - Product B 20,000 25,000 18,000
28,500 32,500 25,500DisbursementsInventory purchases 30,000 8,000 10,000Wages 5,500 5,500 5,500Wage benefits 550 550 550Rent 2,000 2,000 2,000
Office supplies 400 400 400Income tax installments 1,200 1,200 1,200Loan payment 575 575 575Interest & bank charges 50 50 50
40,275 18,275 20,275
Monthly surplus (deficit) (11,775) 14,225 5,225Cash balance, end of month (11,675) 2,550 7,775
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Asset Replacement
Buying property & equipment is a largecash outflow
Monitor condition of these assets todetermine when they will need to be
replaced Can use net book value (cost –
accumulated depreciation) to help
determine timing of replacement Planning = time to shop around and secure
appropriate financing
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Future Obligations
What have you committed yourbusiness to? – Long-term bank loans
– Purchasing commitments with suppliers – Rent increases in lease
– Plan on buying out lease at end of term
Budget appropriately to meet theseobligations
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Summary
Financial statements – Income statement
– Balance sheet
– Cash flows Financial statement ratios
– Debt-to-equity
– Current (working capital) – Accounts receivable & inventory turnover
– Gross profit percentage
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Summary
Improving cash flow & ratios Future commitments
Christa Casey, CA
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The Entrepreneurship Centre
110 Laurier Ave. West
Ottawa, Ontario K1P 1J1
Tel.: (613) 560-6081
Fax.: (613) 560-2102
Email: [email protected]
Helping Businesses Succeed