Tutorials week 48 Amsterdam Business School Accounting 2016-2017 P 6011P0148 / PE 6011P0150 Tutorials week 48 Amsterdam Business School

So far…. Financial statements and relationship between them Recording economic transactions (journal entry method) Understanding account types Getting familiar with economic transactions related to the balance sheet (assets, liabilities and owner’s equity) Accounting Week 48

Today Understanding the structure of the income statement Understanding the goal and structure of the cash flow statement Prepare a cash flow statement with the direct and indirect method Using indicators based on information from financial statements to analyze the performance of a company Rounding up the financial accounting part of the course Accounting Week 48

Contents CH9:P 9.20, P9.24, P9.26, CH3: P3.19, C3.24 CH11: P11.14 Summary Accounting Week 48

P9.20 (page 348) We practice the structure of the income statement We get familiar with the income related to various activities We learn how the net income (which goes to retained earnings at the end of the year and also the first item in an indirect cash-flow statement) is calculated Accounting Week 48

Selling, general, and administrative expenses 51,000 Accounts payable Item Value Selling, general, and administrative expenses 51,000 Accounts payable 85,000 Research and development expenses 37,000 Loss from discontinued operations, next of tax savings od $5,000 17,000 Provision for income taxes 18,000 Net sales 489,000 Interest expense 64,000 Net cash provided by operations 148,000 Costs of goods sold 272,000 Accounting Week 48

Accounting Week 48

Accounting Week 48

Cash-flow statement Methods Direct (P9.26) Indirect (P9.23) Structure The main structure (three parts) is the same for both methods, the approach to calculate those items are different Accounting Week 48

How to prepare a cash-flow statement with the direct method? Record all the economic transactions Select those transactions which involve the “Cash” account Identify where the transactions related to changes in “cash” go in the cash-flow statement Accounting Week 48

Direct Method Accounting Week 48

Accounting Week 48

Indirect method (P9.24 page 349-50) Item Value Depreciation and amortization expenses 520 Cash dividends declared and paid 660 Purchase of equipment 1,640 Net income 768 Beginning cash balance 240 Proceeds of common stocks issued 296 Proceeds of sale of building 424 Accounts receivable increase 32 Ending cash balance 80 Inventory decrease 76 Accounts payable increase 88 Accounting Week 48

Note that investing activities relate primarily to changes in non-operating asset accounts, and that financing activities relate primarily to changes in non-operating liability and stockholders’ equity accounts. Accounting Week 48

Financial indicators C3.24 Practicing calculating Accounting Week 48

Accounting Week 48

Accounting Week 48

Accounting Week 48

Accounting Week 48

ROI = (9.9% margin * 1.01 turnover) = 10.0%** Note 1: You may have calculated margin and ROI based on “Net earnings attributable to Campbell Soup Company” rather than “Net earnings,” as follows: Margin = ($818 net earnings attributable to Campbell Soup Company / $8,268 net sales) = 9.9%   Turnover = Net sales / Average total assets = $8,268 / (($8,323 + $8,113) / 2) = $8,268 / $8,218 = 1.01 ROI = (9.9% margin * 1.01 turnover) = 10.0%** Note 2: You may have calculated ROE based on “Net earnings attributable to Campbell Soup Company” rather than “Net earnings” in the numerator. In that case, “Total Campbell Soup Company Shareholders’ equity” rather than “Total equity” should be used in the denominator as well: ROE = Net earnings attributable to Campbell Soup Company / Average total Campbell Soup Company shareholders’ equity = $818 / (($1,217 + $1,615) / 2) = $818/ $1,416 = 57.8% Accounting Week 48

3. Price/earnings ratio = ($41. 96 market value per common share / $2 3. Price/earnings ratio = ($41.96 market value per common share / $2.59 diluted earnings per common share outstanding) = 16.2   4. Dividend yield = ($1.248 dividends declared per share / $41.96 market value per common share) = 3.0% 5. Dividend payout ratio = ($1.248 dividends per common share / $2.59 diluted earnings per common share outstanding) = 48.2% Note that diluted earnings per share is normally used in the P/E calculation Accounting Week 48

b. 1. Working capital = ($2,100 current assets - $2,989 current liabilities) = $(889) million   2. Current ratio = ($2,100 current assets / $2,989 current liabilities) = 0.70   3. Acid-test ratio = (($232 cash and cash equivalents + $670 accounts receivable) / $2,989 current liabilities) = $902 / $2,989 = 0.30 By excluding inventories and other non-liquid current assets , the acid-test ratio gives a conservative Assessment of the firm’s bill-paying ability. Accounting Week 48

4. Inventory turnover = Cost of products sold / Average inventories 1. Average day's sales = ($8,268 annual net sales / 365 days) = $22.65 million   Number of days' sales in accounts receivable = ($670 accounts receivable / $22.652 average day's sales) = 29.6 days 2. Average day's cost of products sold = ($5,370 annual cost of products sold / 365 days) = $14.712 million Number of days' sales in inventory = ($1,016 inventories / $14.712 average day's cost of products sold) = 69.1 days 3. Accounts receivable turnover = Net sales / Average accounts receivable = $8,268 / (($635 + $670) / 2) = $8,268 / $652.5 = 12.7 times 4. Inventory turnover = Cost of products sold / Average inventories = ($5,370 / (($925 + $1,016) /2) = $5,370 / $970.5 = 5.5 times 5. Net property, plant, and equipment turnover = Net sales / Average plant assets, net of depreciation = $8,268 / (($2,260 + $2,318) / 2) = $8,268 / $2,289 = 3.6 times Note: The result of c1. may be understated to some extent because it is based on the assumption that all of Campbell’s $8,268 net sales resulted from credit sales. To the extent that Campbell’s makes cash sales, the average days’ sales result in the denominator will decrease, thus causing the number of days’ sales in accounts receivable to increase.) Accounting Week 48

= (($6,510 total liabilities) / $1,603 total equity) = 406.1% d.   e. 1. Debt ratio = (Total liabilities / Total liabilities and stockholders’ equity) = (($6,510 / $8,113 total liabilities and equity) = 80.2% 2. Debt/equity ratio = (Total liabilities / Total stockholders’ equity) = (($6,510 total liabilities) / $1,603 total equity) = 406.1% 1. Net sales per employee = Net sales / Number* of employees for the year = $8,268 million / 19,400 employees = $426,186 per employee 2. Operating income per employee = Earnings before interest and taxes / Number* of employees for the year = $1,192 million / 19,400 employees = $61,443 per employee * Normally, these ratios would be calculated based on the “Average number of employees for the year,” but Campbell’s only discloses the number of employees at August 3, 2014. Accounting Week 48