1. MGMT 497 Accounting/Finance
Forecasting
Sales, market share, etc.
Operation
Capacity (plant, addition, line), production (first shift, 2nd shift, overtime), sales office order, inventory control, etc.
Human Resources
Hiring, training, salary/commission, etc.
Marketing
Product management (pricing, product model, quality and feature), advertising, R&D, etc.
Finance/Accounting
Capital budgeting, capital structure (debt/equity), cash management, financial statements analysis, etc.

2. Finance related decisions
Financing
Internal capital (retained earnings) versus external capital (debt or equity)
Debt (short-term bank loans or long-term bond issuance)
Dividend policy
Paying dividends to outside stockholders by parent company
Capital budgeting or investment decisions
Adding or closing new plant, adding or deactivating lines, etc.

3. Dos Forecast sales correctly Proper production capacity
Good marketing strategies
Sound financing decisions
Good Industry analysis
Cost and benefit analysis

4. Don’ts Avoid stock-out
Avoid emergency loans due to negative cash balance
Avoid drastic changes without valid reasons
Avoid making decisions without considering costs and benefits

5. Business policy game performance measurement
Return on assets (ROA)
Return on equity (ROE)
Market share
Stock price
Unit production cost
Total net income

6. Weighing Factors
20 points to be allocated among six performance criteria
At least five points given to ROA and ROE combined
At least three points given to stock price
At least two points given to total net income

7. Return on assets (ROA) Average net income years 3 thru 6
Average year end assets year 3 thru 6
Component ratios (determinants)
Net profit margin (driven by expenses)
Total asset turnover (driven by efficiency or sales generated by each dollar of assets)

8. Return on Equity (ROE) Average net income years 3 thru 6
Average year end equity years 3 thru 6
Component ratios (determinants)
Net profit margin (driven by expenses)
Total asset turnover (driven by efficiency or sales generated by each dollar of assets)
Equity multiplier (driven by use of debt)
At least five points given to ROA and ROE combined

9. Example of determinants of ROA and ROE
Total revenue: 200
Net income: 6
Total assets:100
Equity:80
Debt:20
Net profit margin=6/200=3%
Total asset turnover=200/100=2
Equity multiplier=100/80=1.25
ROA=3%x2=6% or 6/100=6%
ROE=3%x2x1.25=7.5%% or 6/80=7.5%

10. Market Share Total company dollar sale years 3 thru 6
Total industry dollar sale years 3 thru 6
Company sales vs industry sales
Pricing
Advertising
Sales force compensation
Product model, quality, and feature

11. Stock Price Average year end stock price year 3 thru 6 Earnings
Capital structure (debt vs equity)
Credit rating
Dividends paid
At least 3 points

12. Examples of Factors affecting credit rating & stock price
Avoid emergency loan
Meeting debt obligation
Growth of total assets
Increasing market share
Good ROE
Paying dividends
Avoid excessive debt financing
Good interest coverage

13. Unit Production Cost Average unit production cost years 3 thru 6
Labor cost, material cost, maintenance cost, layoff cost, shutdown cost, equipment depreciation, plant depreciation
Consider variable cost vs fixed cost

14. Total Net Income Sum of net income years 3 thru 6 Sales
Cost of goods sold, operating expenses and non-operating expenses
At least 2 points

15. Capital spending See page 153. New plant with 2, 4,… up to 10 lines
Takes 3 quarters to complete
For example, 4 line pant costs $1.9 million or $0.6 million a quarter (page 151), subject to inflation.
New addition (2 lines) to existing plant
Takes 2 quarters to complete
Costs $0.9 million or $.45 million a quarter; inflation.
New line
Takes one quarter to complete
$.5 million, plus hiring/training of new workers $.1 million per line.

16. Sources of capital See capital budget worksheet, page 167
Accumulated retained earnings
Issue bonds
Issue stocks
3-month bank loans
Selling stocks to parent

17. Finance Decision Variables
Bank loan
Bond issue
Stock issue
Dividends
Time Deposit CDs

18. Bank Loans $2.5 million line of credit available to parent
Access to line of credit using 3-month bank loans by parent
Bank loans cannot exceed 50% of the value of receivables and inventory of previous quarter.
Bank loans are not available if there are bank loans outstanding during each of previous three quarters.
Recommended for short-term financing only

19. Emergency Loans Not a decision variable
Automaticaly given in case of insufficient funds (negative ending cash balance)
Interest rate
Normal rate + 5%, first emergency loan
Normal rate + 15%, second
Normal rate + 30%, third
Normal rate +45%, fourth and after
Reduction in credit rating
Ensure sufficient funds by using retained earnings, bank loans (short-term), or issuing stocks or bonds (long-term) to avoid emergency loans

20. Bond Issue 10-year callable secured bonds in multiples of $1 million
Bonds outstanding cannot exceed 75% of net fixed assets of previous quarter.
Bonds outstanding cannot exceed 50% of equity.
Interest rate depends on market rate and the credit rating of the firm.
Bonds may be redeemed, but no more than $500,000 face value in any one quarter.

21. Stock Issue Minimum of $1 million each issue Stock issue price =
shares outstanding x latest market price/(shares outstanding + shares to be issued)
Higher credit rating, higher issue price.
Add 10% to above issue price for credit rating of 1.
Subtract 10% from above issue price for credit rating of 3.
Enter number of shares to be issued.
Shares can be repurchased at 10% higher than market price leaving at least 3 million shares outstanding and only when accumulated earnings are nonnegative. (Do not repurchase stock when short of cash.)

22. Stocks Sold by Subsidiaries to Parent
Not a decision variable
Automatic sale of stocks by subsidiaries to parent in case of insufficient funds for operating and investing requirements.
Only way to obtain funds for subsidiaries besides accumulated retained earnings at subsidiaries

23. Dividends Dividends paid by parent to stockholders
Dividends paid in any one quarter combined with dividends paid in previous three quarters cannot exceed the total earnings in previous four quarters.
No dividends paid when accumulated retained earnings are negative.

24. Dividends from Subsidiaries to Parent
Not a decision variable
20% of net profit must be set aside until accumulated earnings are at least 50% of capital stock.
No dividends paid to parent if cash balance is less than $100,000 in Merica and 1 million pesos in Sereno.
No dividends paid to parent if accumulated earnings are negative last quarter.

25. Certificate of Deposits
3-month CD in multiples of $100,0000
Earn quarterly interest rate on CDs given in the Quarterly Industry Report for 3-month CDs
Interest available at the end of each quarter. Principal available in the beginning of next quarter.
Short-term investment of funds
Do not purchase CDs when short of cash.

26. Income Statement See page 179 sales - cost of goods sold
= gross profit
-operating expenses
= operating profit
+ other income
- other expenses
- income tax
=Net profit

27. Sales and Cost of Goods Sold
=Sales to customers
+ Sales to affiliates
+ Sales to liquidators
Cost of goods sold
=beginning inventory
+ goods manufactured
+ goods purchased from affiliates (not for consolidated statement)
- ending inventory

28. Goods manufactured Sales forecast for all market areas
+ safety stock for all market areas
-beginning inventory from all market areas

29. Ending Inventory (in units)
For market area with production plant
beginning inventory ,000
+units produced ,000
- sales to affiliates ,000
-sales to customers ,000
=ending inventory = 60,000

30. Ending Inventory (in units)
For affiliates
Affiliate sales office purchases ,000
+ beginning inventory ,000
-sales to customers ,000
=ending inventory = 15,000
Affiliate sales office purchases
Sales forecast ,000
+safety stock ,000
- Beginning inventory ,000

31. Selling Expense Selling expense Advertising expense Sales salaries
Sales commissions
General selling expense
Transportation expense
Sales office depreciation

32. Administrative & General Expense
Research and development
Training expense
Storage expense
Executive compensation
Other expense

33. Other Income & Other expenses
CD interest
Capital gain (loss)
Other expense
Loan interest
Bond interest
Income tax

34. Consolidated Income Statement
Zero sales to affiliates
Consolidated sales should not include sales to affiliates.
Zero purchases from affiliates
Consolidated cost of goods sold should not include purchases from affiliates.

35. Consolidated total sales
Do not include sales to affiliates.
Home area total sales (including sales to affiliates); $2199=$1009+$1190
Minus home area sales to affiliates; $1190
Plus affiliate sales to customers; $755, $755, $(4841/6)=$806
$ $ $755 + $755 +$806 = $3325

36. Consolidated cost of goods sold
Do not include purchases from affiliates.
Consolidated beginning inventory;$549
Plus consolidated goods manufactured;$1494
Minus consolidated ending inventory; $523
= consolidated cost of goods sold;($549+$1494- $523=$1520)
Cost of goods sold = Beginning inventory + goods manufactured + purchases from affiliates –ending inventory

37. Production Cost See page 142
For model 1, 6 lines, 40-hour shift, 312,000 units
Labor cost ($2.88x312,000=$899,000)(see report E)
Material cost ($1.23x312,000=$384,000)
Maintenance cost ($.25x312,000=$78,000)
Layoff cost

38. Production cost continued
Equipment depreciation (non cash fixed expenditure)
$3,000,000x (1/(7x4))=$107,000
Plant depreciation (non cash fixed expenditure)
$ (1/31.5x4)x$3,300,000=$26,000

39. Total production cost & unit production cost
Labor cost, $899,000
Material cost, $384,000
Maintenance cost, $78,000
Equipment depreciation, $107,000
Plant depreciation, $26,000
Total production cost = $1,494,000
Unit production cost =$1,494,000/312,000=$4.78

40. Unit fixed cost Increased production unit reduces unit fixed cost.
Produce 312,000 units
Equipment depreciation per unit: $0.343
Plant depreciation per unit: $0.083
Labor cost per unit: $2.88
Produce 328,000 units
Equipment depreciation per unit: $0.326
Plant depreciation per unit: $0.079
Labor cost per unit: $2.95 (overtime)

41. Tax Losses
Reduced consolidated taxable income and taxes during the quarter of the loss.
Losses carried forward to future quarters, reducing subsidiary’s taxable income and taxes but not the consolidated taxable income and taxes.

42. Statement of Cash Flow
See page 195 Operating cash receipts - Operating cash expenditures = net operating cash flow Investment receipts - Investment expenditures = net investment cash flow Financing receipts - Financing expenditures = net financing cash flow

43. Statement of cash flow continued
Beginning cash balance
+ net cash flow
= ending cash balance
If ending cash balance (for both parent and subsidiaries) <0, emergency loan will be generated. Resulting in sales force resignation, reduced customer demand, lower credit rating, and stock price.

44. Operating receipts Collection from last quarter sales
Collection from current quarter sales
For Merica 50% collected current quarter, and 50% next quarter; for foreign subsidiary 40% collected current quarter and 60% collected next quarter
Net sales to affiliates
Sales to liquidators
Subsidiary dividends received
CD interest

45. Operating Expenditures
Production cost
Purchases from affiliates
Operating expense
Interest paid
Income tax paid

46. Investment Receipts & Expenditures
Fixed assets sold
CD matured
Expenditures
Plant investment
New equipment
Sales office investment
Subsidiary stock purchased
CD purchased

47. Financing Receipts & Expenditures
Stock sale
Bond sale
Bank loans
Stocks sold to parent
Expenditures
Stock repurchased
Bonds redeemed
Bank loans repaid
Dividends paid to stockholders
Dividends paid to parent

48. Consolidated Cash Flow Statement
Zero net sales to affiliates
Zero purchases from affiliates
Zero dividends received from subsidiaries (parent)
Zero dividends paid to parent (subsidiaries)
Zero subsidiary stock purchased (parent)
Zero subsidiary stock sold (subsidiaries)

49. Balance Sheet See page 203 Current assets + Fixed assets
= Total assets
Current liabilities
+ Long-term liabilities
=Total liabilities
Capital stock
+Accumulated retained earnings
+Accumulated foreign currency adjustment
=Total equity
Total liabilities + total equity = total assets

50. Current Assets
Cash
Time Deposit CDs
Accounts receivable
Inventory

51. Fixed Assets Net sales office Net manufacturing plant
Net manufacturing equipment
Equity in subsidiaries
Other investments

52. Current liabilities & Long-term Liabilities
Accounts payable
Bank loans
Taxes payable
Long-term liabilities
Bonds outstanding

53. Equity Capital stock includes stock issued and repurchased
Accumulated retained earnings
Accumulated foreign currency adjustment

54. Consolidated Balance Sheet
Zero equity in subsidiaries
Capital stock is equal to that of the parent.
Accumulated retained earnings are equal to that of the parent.
Total equity is equal to that of the parent.
Page 200 of Player’s Manual
Equity in subsidiaries = capital stock of subsidiaries + accumulated retained earnings of subsidiaries

55. Retained Earnings Retained earnings = Net profit
+ dividends received from subsidiaries (parent)
- dividends paid to parent (subsidiaries)
- dividends paid to shareholders (parent)

56. Foreign currency adjustment
Total assets of foreign subsidiary fall in value if exchange rate rises. They rise in value if exchange rate falls.
This change in value is reflected in the consolidated foreign currency adjustment entry on income statement.

57. Accumulated foreign currency adjustment
Consolidated total equity =
Consolidated total assets – consolidated total liabilities
Accumulated foreign currency adjustment=
Consolidated total equity – (Consolidated capital stock and accumulated retained earnings)
Accumulated retained earnings and capital stock of foreign subsidiary are translated using historical exchange rates when the earnings were earned and stock sold resulting in discrepancy.

58. Pro Forma Financial Statements
Pro Forma Income Statement
Chapter 10
Page 179
Pro Forma Cash Flow
Page 195
Pro Forma Balance Sheet
Page 203

59. Financial Statements for Two-Year Plan
Quarterly income statement, balance sheet and cash flow statement
Consolidated quarterly income statements with annual totals.
Consolidated year-end balance sheets.
Consolidated quarterly cash flow statements with annual totals.
Actual financial statements for years 3 and 4
Pro-forma financial statements for years 5 and 6

60. Pro Forma Financial Analysis
Using your pro forma financial statements to derive the six performance criteria.
ROA
ROE
Market share
Stock price: use historic P/E ratio and projected earnings (Price/Earnings Per Share)x EPS
Unit production cost
Total net income

61. Pro Forma Financial Analysis continued
Compare your projected six performance criteria based on the pro forma financial statements with those set under goals and objectives
State whether your objectives are expected to be met by your plans.

62. Mistakes to be avoided Balance sheet is not balanced.
Ending cash in cash flow statement does not agree with the cash in balance sheet.
Annual balance sheet is derived from adding numbers of quarterly balanced sheet.
Beginning inventory, goods produced, ending inventory in income statement are measured in units.

63. Final Corporate Report
Annual income statement for year 5 and year 6
Annual balance sheet for year 5 and year 6
Annual cash flow statements for year 5 and year 6
Compare actual results of Year 6 with the projected results from the two-year plan.
Explain any variances between the actual results and projected results that are greater than 25% in either direction.