Types of Questions Discounted cash flows –debt (expedition problem) Discounted cash flows – investment (contribution margin, jdc) Accrual Basis Income (journal entries, nursery) Financial statements (direc t or indirect) Gross Profit (Gross Margin) = Sales Revenue – Cost of Goods Sold Gross Profit (Gross Margin) Percentage = Gross Profit / Sales Revenue Operating Income = Gross Margin = Operating Expenses + Other Net Operating Revenues Operating Income Ratio = Operating Income / Sales Revenue Ability to meet debt payments: Times Interest Earned = Income before Interest and Taxes / Interest Expense Cost Behavior = how costs change as sales volume changes. Common model is to classify as Fixed and Variable Costs Fixed Costs = do not change as sales volume changes Variable Costs = costs that change proportionately as sales volume changes Ability to pay current liabilities with current assets, aka liquidity: Current Ratio = Current Assets / Current Liabilities Ability to meet immediate debt: Quick Ratio = Monetary Current Assets / Current Liabilities number of dollars of sales generated during the year by each dollar of assets: Asset turnover = Sales / Average Total Assets Extent to which the company is financed with borrowed resources (debt) and with investor resources (equity): Debt-equity ratio = Total Debt (or long term debt) / Stockholder’s Equity Percentage of total assets financed through debt of any kind: Debt Ratio = Total Liabilities / Total Assets Proportion of assets financed by the direct and indirect investment of owners: Equity Ratio = Total Stockholders’ Equity / Total Assets Compares what the company earns to the amount it has invested: Return on assets (ROA) = Net Income / Total Assets What the stockholders earn on their investment in the company: Return on Equity = Net Income / Total Stockholders’ Equity Difference between ROA and ROE: Leverage = Average Total Assets / Average Total Stockholders Equity ROA = Profit Margin Ratio x Asset Turnover ROE = Profit Margin Ratio x Asset Turnover x Leverage Net income expressed on a per-share, basis: Earnings per share = Net income / Weighted number of shares outstanding How the market values the firm’s earnings: Price-earnings ratio = Market price per share / Earnings per share Percentage of net income paid out to the stockholders as dividends: Dividend payout ratio = Cash dividends / Net income Reasons for purchasing outstanding stock • Employee Compensation plans – stock issued to employees in exchange for services • Improve earnings per share – company repurchases shares, outstanding shares decreases allocating more earnings to each remaining share • Corporate Acquisitions – company exchanges shares in exchange for shares of another company • Stock Price – company may increase the market price of its stock by purchasing outstanding shares, thus reducing the supply Reasons for issuing stock dividends • Companies may wish to retain its cash yet still appear to offer some type of dividend to its shareholders • Companies may also want to reduce the market price per share to make stock more attractive to small investors Income Statement Accounts Operating section: Revenue, Expenses, Cost of Goods Sold / Cost of Sales, Selling expenses, General and Administrative expenses, Depreciation / Amortization, Research and Develpment Expenses Non-Operating section: Other revenues or gains, other expenses or losses, finance costs, income tax expense Balance Sheet Accounts Current assets: cash and cash equivalents, inventories, accounts receivable and prepaid expenses Non-current assets: property (plant and equipment), investment property, intangible assets, financial assets, investments, biological assets Liabilities: accounts payable, provisions, financial liabilities, liabilities and assets for current tax, deferred tax liabilities and assets, unearned revenue for services paid for by customers and not yet provided Equity: Issued capital and reserves attributable to equity holders of the parent company (controlling interest), noncontrolling interest in equity Amortization table Payment Date Beginning Balance Starting Interest (strating)(rate) Cash Payment Standard Change in Principal (payment – interest) Ending Balance (starting) – (change in principal) List of Revenues and Expenses for cash income model Revenues Cash from sales NOT sales revenue on cash income Expenses Salaries, utility bills, rent, taxes, depreciation, insurance Not cash paid for equipment or investment Revenue – Expenses = Net Income Cash from customers = accts receivable past yr + sales = accts receivable current yr Notes for Accrual Journal Entries 1 Prepaid insurance-cash, insurance expense-prepaid insurance, 2 cash-notes payable, interest expense-cash, interest expense-interest payable, 3 supplies inventory-cash, supplies expense-supplies inventory, 4 cash-unearned revenue, unearned revenue-revenue Assets- cash, prepaid insurance, supplies Liabilities- notes payable, interest payable, unearned revenue Direct Statement of Cash Flows Cash from operating activities: Cash from customers Cash to suppliers Cash for administrative Cash for insurance Cash for salaries Cash for selling Cash for interest Cash for income taxes Cash From Operating Activities__________ Cash from Operating Activities: Cash from customers Cash to suppliers Cash for rent Cash for salaries Cash for supplies Cash for interest Cash for income tax Cash from operating activities Cash from Investing Activities Cash paid for equipment Cash From investing activities Cash from Financing Activities Cash from issue of stock Cash from bank loan Cash from financing activities Net Change in Cash Beginning balance in cash Ending balance in cash 140,000 (57,500) (5,000) 0 (10,000) 0 0 _ ------------- 67,500 ($42,000)_ (42,000) $75,000 25,000___ 100,000 125,500 $125,000 Find NI for Indirect Sales Revenue -CGS Gross Margin Less Operating Expenses Wages Depreciation Other Operating Income + Interest Revenue Net Income 750,000 360,000 390,000 (280,000) (43,000) (15,000) 338,000 52,000 6,000 58,000 Indirect Statement of Cash flows (only balance sheet accounts) Cash From Operating Activities Net Income +Bad Debt Expense +Depreciation Expense Change in Accounts Receivable Change in Inventory Change in taxes receivable Change in prepaid insurance Change in accounts payable Change in salaries payable Change in interest payable Cash from operating activities______________ Cash From Investing Activities Cash paid for Equipment Notes for indirect: Change in Account: Ending Balance – Beginning Balance Add back depreciation Increase liability  add Decrease liability  subtract Increase asset  subtract Decrease asset  add Cash from Customers Sales + Beginning Accounts Receivable -Ending Accounts Receivable Cash paid to suppliers Cost of Goods Sold -Beginning Inventory +Ending Inventory +Beginning Accounts Payable -Ending Accounts Payable Cash Paid for Supplies Supply Expense -Beginning Supplies Inventory +Ending Supplies Inventory Cash paid for income taxes Income tax expense +Beginning income tax payable -Ending Income tax payable JDC Setup Cost of studio -salvage value =Depreciable basis ÷ expected life =yearly depreciation CM = #students*tuiton - salaries Contribution Margin -taxes +taxshield (tax rate * yearly depreciation) =ATCF *PV(series, periods, rate) =NCF +expected disposal * PV(single) -cost of building +value of old building =value of project Cash paid for interest Interest expense +Beginning interest payable -Ending interest payable Cash paid for Rent Rent Expense -Beginning Prepaid Rent +Ending Prepaid Rent Cash Paid for Salaries Salary Expense +Beginning Salary Payable -Ending Salary Payable