1. Bill McMican william.mcmican@cambridgecollege.eduwilliam.mcmican@cambridgecollege.edu Cambridge College Master of Management

2. Agenda Essentials Essentials 3 Primary Financial Reports 3 Primary Financial Reports 9 Key Concepts 9 Key Concepts Depreciation Depreciation Cash Flow Statement Cash Flow Statement Key Ratios Key Ratios Financial Case Studies Financial Case Studies

3. Financial Reports Balance Sheet Balance Sheet Assets = Liabilities + Owners Equity Assets = Liabilities + Owners Equity Point in Time - Status of the Company Point in Time - Status of the Company Income Statement (Profit Loss) Income Statement (Profit Loss) Revenue – Expenses = Net Profit Revenue – Expenses = Net Profit Period of Time Period of Time Cash Flow Cash Flow Shows only changes in Cash Shows only changes in Cash Solvency of the Company Solvency of the Company

4. Financial Reports Balance Sheets Assets Current   Cash   Receivables   Inventory   Pre-paid Items Non Current   Equipment   Buildings   Land   Good Will Liabilities Current  Payables  Payroll Payable  Taxes Payable Non Current  Notes > 1 yr  Bonds > 1 yr Owners Equity  Stock Sold at Par  Other Paid in Capital  Retained Earnings =

5. Financial Reports Income statements Revenue Sales Interest Other Expenses Cost of Goods Payroll Travel Tax Depreciation Training Etc. Etc. Net Income after Tax - Less Dividends = Retained Earnings = -

6. Debits and Credits Revenue Expenses Assets Liabilities Owners Equity Debit BalancesCredit Balances

7. 9 Basic Precepts Matching Expenses & Revenue: Same time Realization Revenue when Goods Delivered Materiality Disregard insignificant matters Conservatism Revenue: when certain. Expenses: when likely Asset Measurement Only facts in money amounts Going Concern Business: Continuing Operation Entity Legal Entity only: not the people Money Measurement Only facts in money amounts Dual Aspect Always in balance A=L+OE

8. Depreciation Expense (Yr1) Depreciation Exp $10,000 Assets (at end of Yr 1) Non-Current Equipment TRUCK $50,000 Accumulate Depr. - $10,000 Book Value $40,000

9. Depreciation Assets recorded at cost Straight Line or Accelerated Land has unlimited life – rarely deprecated Depreciation Expense is an Estimate Book Value = Cost – Accumulated Depreciation Book Value does not equal assets “REAL” worth Straight Line Accelerated

10. Statement of Cash Flows CASH Beginning Balance 1/1/06 130,000 Cash Sales 70,000 Accounts Receivable Payments 10,000 Payment for New Assets 50,000 Payroll45,000 Rent Paid 5,000 Interest Received 1,000 Bonds sold for cash 50,000 Paid Accounts Payable 60,000 Ending Balance 2/1/06 101,000 NET CASH FLOW = - $29,000

11. Key Ratios and Metrics Profitability Profit Margin %= Net Income / Sales Revenue = PM% Gross Margin % = (Sales - Cost of Sales) / Sales = GM% Capital Utilization Days Receivables= Acc Receivables / Sales / 365 days = days Inventory Turnover= Cost of Sales / Inventory = turns Current Ratio= Current Assets / Current Liabilities Quick Ratio= Working Capital / Current Liabilities Debt Ratio= Non Current Liabilities / (Non-Current Liabilities + Equity) Return on Equity = Net Income / Equity Metrics Working Capital= Current Assets – Current Liabilities Permanent Capital= Working Capital + Non-Current Assets