André A. MarksAndré A. MarksFINC615 – 1004B – 01: Applied FINC615 – 1004B – 01: Applied

Managerial FinanceManagerial FinanceInstructor: Dr. Samara KramerInstructor: Dr. Samara Kramer

November 26, 2010November 26, 2010

Objectives

To give a brief financial introduction to the furniture industry

To discuss the four primary financial statements used by Superior Living, Inc.

Explain how data is collected to develop these financial statements

Discuss what the financial statements measure

Explain the linkage among the financial statements

Introduction to the industry

There has been a dramatic dropped in high-end furniture purchases due to affluent consumers restructuring their priorities. They are only buying what they need.

Consumer confidence crippled by a housing crisis has caused the bottom to drop out of the U.S. furniture market with a 13% decline in sales in the forth quarter of 2008 compared to forth quarter sales in 2007.*

There are about 1 million fewer affluent household buying luxury furniture which equated to a $2 billion drop in the sales of high-end furniture between 2007 and 2008.*

In the first 6 months of 2009, Ethan Allen sales were down by 30%, the most it had been since the great depression.**

Ethan Allen introduces new technology to drive sales, and it is working. Consumers can upload photos of actual rooms in there homes and completely furnished their homes online or on their iPads with Ethan Allen furniture and accessories.

During the first nine months of 2010, Ethan Allen sales increased by about 15% and the company recently opened its 45th store in China, of which over 280 operate worldwide.**

Ethan Allen is making it work in America with over 70% of their products being manufactured in the U.S. and over 60% of their sales made abroad. This is a long-term strategy for recovery and growth.**

Source: MarketResearch.com* and Forbes.com**

Four financial statements…

The Balance Sheet

The Income Statement

Statement of Retain Earnings

Statement of Cash Flows

Balance Sheet

Assets Current assets

Cash

Accounts Receivable

Inventory

Total

Fixed assets

Net Plant and equipment

Trademarks and patents

Total assets

Liabilities and Owners’ Equity Current liabilities

Accounts payable

Notes payable

Total

Long term debt

Owners’ equity

Common stock and paid-in-surplus

Retain earnings

Total

Total liabilities and owners’ equity

Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9th edition, page 52.

Income Statement

Sales

Cost of goods sold

Depreciation

Earnings before interest and taxes

Interest paid

Taxable income

Taxes (30%)

Net income

Dividends

Addition to retain earnings

Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9th edition, page 53.

Statement of Retained Earnings

Retained Earnings, December 31, previous year

Plus: Net Income current year

Total:

Minus: Dividends Paid current year

Retained Earnings, December 31, current year

Statement of Cash Flows

Cash, beginning of year Operating activity

Net Income

Plus:

Depreciation

Increase in accounts payable

Less:

Increase in accounts receivable

Increase in inventory

Net cash from operating activity

Investment activity Fixed assets acquisitions

Net cash from investment activity

Financing activity

Decrease in notes payable

Decrease in long-term debt

Dividends paid

Increase in common stock

Net cash from financing activity

Net increase in cash

Cash, end of year

Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9th edition, page 50.

Sources and Uses of Cash

Sources of cash Cash beginning of the year

Operations:

Net income

Depreciation

Working Capital:

Increase in accounts payable

Long term financing

Increases in common stock

Total sources of cash

Uses of cash Working capital:

Increases in accounts receivables

Increase in inventory

Decrease in notes payable

Long term financing: Decrease in long term debt

Fixed asset acquisitions

Dividends paid Total uses of cash

Net addition to cash

Cash, end of year

Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9th edition, page 50.

How is the data collected?

The Bookkeeping process

As the company records financial transactions over a period of time, the financial statements begin to appear. (Peavler, n.d.)

What do they measure? The

Balance Sheet shows how much the company is worth. It shows the book value of the company’s net worth.

The Income Statement is sometimes called the statement of profit and loss because it shows the company’s profitability.

The Statement of Cash Flows measures the difference in cash flow for the year. It is divided into operations, investments, and finance.

The Statement of Retain Earnings shows the change in the retained earnings account and dividends over a period of time.

Source: Rosemary Peavler, About.com Guide

What links the statements… The balance sheet mirrors the

accounting equation and state items in terms of book value. It is linked to the income statement by the DuPont Identity.

The income statement is linked to the balance sheet because owners equity is made up of revenue and expenses, which is how the income statement is developed. It is also linked to the balance sheet by the DuPont Identity.

The statement of retained earnings uses data from the balance sheet and income statement to make it’s calculations.

The statement of cash flows uses data from the balance sheet and income statement to track the flow of cash.

References

Brennan, M. (2010). Ethan Allen’s sales rebound from consumer confidence woes. Retrieved

on November 25, 2010 from http://blogs.forbes.com/morganbrennan/2010/11/23/ethan-

allens-sales-rebound-from- consumer-confidence-woes/?partner=yahootix

Finance.Yahoo.com. (n.d.). Ethan Allen Interiors Inc. Retrieved on November 18, 2010 from

http:// finance.yahoo.com/q/bs?s=ETH+Balance+Sheet&annual

Investopedia.com. (n.d.). Statement of retained earnings. Retrieved on November 25, 2010

from http://www.investopedia.com/terms/s/statement-of-retained-earnings.asp

Peavler, R. (n.d.). The relationship between the financial statements. Retrieved on November

25, 2010 from

http://bizfinance.about.com/od/yourfinancialposition/qt/Relation_FinSt.htm

Peavler, R. (n.d.). Statement of retained earnings. Retrieved on November 25, 2010 from

http:// bizfinance.about.com/od/yourfinancialposition/tp/Statement_Retained_Earnings.htm

References

Peavler, R. (n.d.). How to prepare a statement of cash flow. Retrieved on November

25, 2010 from http://

bizfinance.about.com/od/yourfinancialposition/a/statecashflow.htm

Ross, S. A., Westerfield R. W., & Jordon, B. D. (2010). Fundamentals of Corporate

Finance (9th edition). New York, NY: McGraw – Hill/Irwin.

Unity Marketing Inc. (2009). High end furniture market trend report. Retrieved on

November 18, 2010 from http://www.marketresearch.com/product/print/default.asp?

SID=84965223-488059349-403130034&productid=2219103