equipment transactions in the balance sheet and p&l · how do the various transactions affect...

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Session T38

TUESDAY MARCH 4, 2014. 3:00 - 4:00pm

Gain the knowledge needed to understand the profit and

loss statement, the balance sheet and the benefits of using

capital both profitably and efficiently.

C.E.M.P. Central Inc.

Mike Vorster. CEMPCENTRAL, Inc . [email protected]

www.cempcentral.com

www.conexpoconagg.com

Equipment Transactions in the

Balance Sheet and P&L

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We must have an understanding of the principles




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Chapter 10 Cash, Cash Flow and Discounted

Cash Flow Analysis

Chapter 11 Balance Sheets, Cash Flow,

Financing and Leasing

To confirm what we will say and for more

details:

www.cempcentral.com




http://www.cempcentral.com/

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1. Statement of Earnings

How is it structured, what does it mean.

2. The Balance Sheet


3. Making money

What happens to the money that you make. How does the

company grow.

4. Transactions

How do the various transactions affect the balance sheet .

5. Ratios

How do you define “good” or “healthy”.

6. Measuring company performance

Lets cover some basics.



What I want you to take home

5 5

Two main reports

Statement of earnings

What did we earn, what did we spend and

what did we bank last year

Balance sheet

The current state of the company –

our assets and our liabilities – life to date

1. Statement of earnings

Generally Accepted Accounting Principles.

International Accounting Standards Board

Financial Accounting Standards Board

6 6

100,000$

Less Direct Job costs

Labor 45,000$

Equipment 18,000$

Materials 15,000$

Sub contractors 5,000$

Job indirect 2,000$

Total 85,000$

Profit on operations 15,000$

Equipment costs

Depreciation 4,600$

Leases, loans 2,300$

Lisc insurance, tax 1,000$

Owning costs 7,900$

Labor 3,300$

Parts and supplies 3,700$

Fuel 5,000$

Operating costs 12,000$

1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$

13,300$ Gross profit from operations

Total equipment costs

Un recovered equipment costs

Equipment indirect

Revenue


Equipment charged to jobs

Gain/(loss) on sale


7 7

IN THE BANK, IN THE END.

And, what does 5% mean?

SG&A – Selling,

General and

Administrative

13,300$

SG&A Costs

Estimating and job planning 4,000$

Human Resources 1,125$

Administration 900$

Facilities 1,100$

Finance 800$

7,925$

Operating Income 5,375$

Other income and expenses 1,500$

Nett income before tax 6,875$

Tax due 3,555$

Income after tax. 3,320$

Gross profit from operations

Total SG&A


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100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$




Equipment indirect

Revenue



Gain/(loss) on sale


Blue money In

Blue money out

9 9

100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$




Equipment indirect

Revenue



Gain/(loss) on sale


Blue money In

Blue money out

10 10

SG&A – Selling,

General and

Administrative

13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$



Total SG&A


No Blue money



11 11

It is pretty simple

What we own minus what we owe others iswhat we are worth.

or

Assets - liabilities = net worth

or

Assets = liabilities + net worth

AssetsLiabilities

Net worth

2. Balance sheet

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Assets – what we own.

Current assets. cash, receivables, and other assets that we could turn into money soon if we needed to

Property plant and equipment. working assets that we own given at their original purchase price (PPE gross) less depreciation (PPE net)

Non current assets. long term investments that we own but that would take some time to turn into cash

2. Balance sheet

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Liabilities – what we owe others.

Current liabilities. notes and accounts payable, we know

we will need to pay these off in the next short while

Long term liabilities. what we owe others but paying off

the debt will take some time

• Long term debt

• Other long term

liabilities

Loans on Equipment

2. Balance sheet

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Net worth - the difference between assets and liabilities

What we would have left if we

– liquidated our assets and

– paid off all our debts.

What the business is worth

Stock at par value + Paid in capital +Retained earnings

What the business is worth

divided by number of shares

= stock price.

2. Balance sheet

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ASSETS

Cash

Current assets

Net PPE

Long term

LIABILITIES

Current

Long Term

NET WORTH

Capital.

Retained

earnings

What we

have

What we

owe

What we

worth

Working capital

= Cash

+ Current assets

- Current liabilities

2. Balance sheet

P 187

16 16

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

Value of equipment on

the asset register at

the original capitalized

value less accumulated

depreciation.

2. Balance sheet

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100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$

13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$


Revenue



Gain/(loss) on sale



Total SG&A


Equipment indirect

3. Making money

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What we

have

What we

owe

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

3. Making money

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Do not confuse “making money” with “making cash”

You can “make cash” by reducing assets and/or by increasing liabilities.

Change in cash = Profit + Reduction in other assets + Increase in liabilities

ONLY PROFIT PRODUCES AN INCREASE IN NET WORTH

Convert

to cashBorrow Borrow

3. Making money

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

20 20





3. Making money


company grow.

4. Transactions


5. Ratios







21 21

Investing or spending – what is the difference

Investing.Spend to buy an asset that will

last for several accounting

periods.

Trade an asset – cash, for another

asset - machine.

Spending.Spend to buy something that is

immediately used to produce

work.

Trade an asset – cash, for

something that is immediately

used up – fuel. Hopefully, this will

be used to generate cash (?)

4. Transactions

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What happens to our balance sheet when we buy and take ownership of a $150 machine using $150 of our own money

Equity

$150

Buy

4. Transactions

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+$150

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

-$150

We change the nature of our assets – working capital is reduced

4. Transactions

Working capital

= Cash

+ Current assets


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What happens to our balance sheet when we buy and take ownership of a $150 machine using $50 of our own money and $100 of borrowed money

Equity Debt

$50 $100

Borrow

4. Transactions

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ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

+$100

-$50

+$150

We change the nature of our assets and the capital structure of our balance sheet

4. Transactions

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ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

+$100

-$50

+$150


Our working

capital has

gone down

Our debt to

equity ratio

has become

worse

Working capital

= Cash

+ Current assets


4. Transactions

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What happens to our P/L statement and balance sheet when we depreciate one of our machines by $50 because we have used it to build work that produced an operating profit of $X in the year

Value of asset used to

generate profit goes down

by $50

Depreciate

4. Transactions

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ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

Operating

profit $X +50

-50

Working capital

= Cash

+ Current assets


4. Transactions

Operating

profit $X

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What happens to our balance sheet when we sell one of our machines for $60 when it has a book value of $35 and an outstanding loan of $10

Equity Debt$60

$10

Sell

$35

$15

4. Transactions

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ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

-$10

+$60

-$35


+$15

$25

$25

4. Transactions

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3. Making money


company grow.

4. Transactions


5. Ratios







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Profitability ratios – measure the effect of the transactions.

5. Ratios

www.suu.edu/business/sbdc/pdf/balancesheetratios.

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Balance sheet ratios – measure the effect of the transactions.

5. Ratios


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Efficiency ratios – measure the effect of the transactions.

5. Ratios


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Liquidity

Ratio Definition Example Value

Working Capital Current Assets – Current Liabilities $52,000 - $35,500 $16,500

Current Ratio Current Assets ÷ Current Liabilities $52,500 ÷ $35,500 1.46


Leverage


Debt to Equity Total Liabilities ÷ Total Net Worth $44,600 ÷ $29,600 1.51

Fixed Asset Ratio Net Fixed Assets ÷ Total Net Worth $17,300 ÷ $29,600 58.5%

Efficiency


Asset Turnover Contract Revenue ÷ Total Assets $171,000 ÷ $74,200 2.3

Fixed Asset Turnover Contract Revenue÷ Net Fixed Assets $171,000 ÷ $17,300 9.8

Equipment Specific


Equipment to Assets Net Fixed Assets÷ Total Assets $17,300 ÷ $74,200 23%

Book Value Ratio Net fixed assets ÷ Purchase price $17,300 ÷ $42,100 41%

5. Ratios

And many, many more – it is a jungle out there.

P 190

36 36

What gets measured, gets managed.

Measure what I can manage.Resources

Processes

Outputs

Efficiencies

Markets

Strategies

What about the stock price

It is a complex issue


37 37

100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$




Equipment indirect

Revenue



Gain/(loss) on sale

Profit in one

form or

another is

the classic.Watch the BLUE

money


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IN THE BANK

SG&A – Selling,

General and

Administrative13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$



Total SG&A

Profit in one

form or

another is

the classic.


39 39

EBITDA is an acronym for earnings before interest, taxes,

depreciation, and amortization. It is a non-GAAP metric that is

measured exactly as stated. All interest payments, tax, depreciation

and amortization entries in the income statement are reversed out

from the bottom-line net income. It purports to measure cash earnings

canceling tax-jurisdiction effects, and canceling the effects of different

capital structures.

Wikipedia.


40 40

EBITDA

100,000$


Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$

13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$




Total SG&A

Revenue

Equipment indirect


Gain/(loss) on sale



Cash

generated

by the

sweat of

your brow.


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Meaning

Shareholder Value Added (SVA)

Value is added when the overall net economic cash flow of the business exceeds

the economic cost of all the capital employed to produce the operating profit.

In sharp contrast, accounting profitability does not necessarily lead to value

creation. In fact, in many cases, profitable projects actually destroy the value of

the company.

SVA = Net Operating Profit After Taxes - ( Capital Employed x Cost of Capital )

Adapted from the Encyclopedia of Management


42 42

Shareholder Value

Added


100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$

13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$


Revenue



Gain/(loss) on sale



Total SG&A


Equipment indirect

Capital is a

scarce and

expensive

resource.

What about the

cost of the

capital used to

earn this revenue

and produce this

bottom line profit.

43 43

Advantages

SVA itself takes into consideration one hugely important variable that most

traditional accounting measures do not - how much capital is being employed in

the business.

SVA combines income statement and balance sheet data to determine the

excess returns available to all capital holders.

Criticism

A sole concentration on shareholder value has been widely criticized. While

shareholder value benefits the owners of a corporation financially, it does not

provide a clear measure of corporate social responsibility and environmental

issues like employment, ethical business practices.

Even one of its earliest users, mentioned before, Jack Welch, has widely

criticized the SVA model - "On the face of it, shareholder value is the dumbest

idea in the world," he said. "Shareholder value is a result, not a strategy. Your

main constituencies are your employees, your customers and your products.”

Adapted from the Encyclopedia of Management


44 44

Wikipedia

Cash & Cash

EquivalentsFixed Assets

Operating

Income

+ + ÷

Inventory Current Assets Assets Asset Turnover

+

Accounts

Receivable

Operating

IncomeX

Return on

Investment

-

Operating

Expenses

Earnings Before

Interest and TaxProfit Margin

+ ÷

Non Operating

Income

Operating

Income


45 45

CFMA Heavy and Highway Contractors

Cash & Cash


Operating

Income

9 17 100


5 29 46 100/46 = 2.2

Accounts

Receivable

Operating

IncomeX

Return on

Investment

15 100 2.2 x 5 = 11%

Operating

Expenses

Earnings Before


98 5 5%

Non Operating

Income

Operating

Income

3 100

What is not included – What can YOU contribute


46 46Wikipedia

Cash & Cash


Operating

Income

+ + ÷


+

Accounts

Receivable

Operating

IncomeX

Return on

Investment

-

Operating

Expenses

Earnings Before


+ ÷

Non Operating

Income

Operating

Income


47 47





3. Making money


company grow.

4. Transactions


5. Ratios







48 48

Two main reports

Statement of earnings

What did we earn, what did we spend and

what did we bank last year

Balance sheet

The current state of the company –

our assets and our liabilities – life to date

Generally Accepted Accounting Principles.


International Accounting Standards Board

Financial Accounting Standards Board

49 49

100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$




Equipment indirect

Revenue



Gain/(loss) on sale


Blue money In

Blue money out

50 50

SG&A – Selling,

General and

Administrative

13,300$

SG&A Costs



Administration 900$

Facilities 1,100$

Finance 800$

7,925$




Tax due 3,555$



Total SG&A


No Blue money



51 51

ASSETS

Cash

Current assets

Net PPE

Long term

LIABILITIES

Current

Long Term

NET WORTH

Capital.

Retained

earnings

What we

have

What we

owe

What we

worth

Working capital

= Cash

+ Current assets


2. Balance sheet

52 52

Do not confuse “making money” with “making cash”

You can “make cash” by reducing assets and/or by increasing liabilities.

Change in cash = Profit + Reduction in other assets + Increase in liabilities

ONLY PROFIT PRODUCES AN INCREASE IN NET WORTH

Convert

to cashBorrow Borrow

3. Making money

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

53 53

ASSETS

What we own

Cash

Current assets

Net PPE

Long term

LIABILITIES

What we owe

Current

Long Term

NET WORTH

What we are

worth

+$100

-$50

+$150


Our working

capital has

gone down Our debt to

equity ratio

has become

worse

Working capital

= Cash

+ Current assets


4. Transactions

54 54

Liquidity


Working Capital Current Assets – Current Liabilities $52,000 - $35,500 $16,500

Current Ratio Current Assets ÷ Current Liabilities $52,500 ÷ $35,500 1.46


Leverage


Debt to Equity Total Liabilities ÷ Total Net Worth $44,600 ÷ $29,600 1.51

Fixed Asset Ratio Net Fixed Assets ÷ Total Net Worth $17,300 ÷ $29,600 58.5%

Efficiency


Asset Turnover Contract Revenue ÷ Total Assets $171,000 ÷ $74,200 2.3

Fixed Asset Turnover Contract Revenue÷ Net Fixed Assets $171,000 ÷ $17,300 9.8

Equipment Specific


Equipment to Assets Net Fixed Assets÷ Total Assets $17,300 ÷ $74,200 23%

Book Value Ratio Net fixed assets ÷ Purchase price $17,300 ÷ $42,100 41%

5. Ratios

And many, many more – it is a jungle out there.

55 55

What gets measured, gets managed.

Measure what I can manage.Resources

Processes

Outputs

Efficiencies

Markets

Strategies

What about the stock price

It is a complex issue


56 56

100,000$


Labor 45,000$

Equipment 18,000$

Materials 15,000$


Job indirect 2,000$

Total 85,000$


Equipment costs

Depreciation 4,600$



Owning costs 7,900$

Labor 3,300$


Fuel 5,000$


1,000$

20,900$

1,200$

19,700$

18,000$

(1,700)$




Equipment indirect

Revenue



Gain/(loss) on sale

Profit in one

form or

another is

the classic.Watch the BLUE

money


57 57Wikipedia

Cash & Cash


Operating

Income

+ + ÷


+

Accounts

Receivable

Operating

IncomeX

Return on

Investment

-

Operating

Expenses

Earnings Before


+ ÷

Non Operating

Income

Operating

Income


58 58





equipment transactions in the balance sheet and p&l · how do the various transactions affect...

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