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The Magic of Financial Statements

Presented by:

Robert E. Mark Chief Financial Officer

Rowe Incorporated

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“I’ve worked myself up from nothing to a state of extreme poverty.”-Groucho Marx

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OVERVIEW

Balance SheetProfit and Loss (Income) StatementStatement of Cash Flows

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The Balance Sheet

LIABILITIES(Amounts owed to outside creditors)

+ EQUITY(Or net worth)_________________

= ASSETS(Resources of the business)

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Liabilities Assets

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ABC ENGINEERING, INC.BALANCE SHEET

DECEMBER 31, 2001

20002001CURRENT ASSETS28,456132,341 Cash

1,098,2341,608,934 Accounts Receivable567,934677,075 Work In Process

01,000 Prepaid Federal Income Tax1,694,6242,419,350Total Current Assets

PROPERTY AND EQUIPMENT210,368234,895 Vehicles

2,323,4562,678,934 Furniture, fixtures and equip450,342567,980 Leasehold improvements

2,984,1663,481,809

769,543878,965Less Accumulated Depreciation2,214,6232,602,844Total Property & Equipment

3,909,2475,022,194TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES

245,792225,932 Accounts Payable323,466543,789 Line of Credit291,364356,781 Current Portion of Long Term Debt860,6221,126,502Total Current Liabilities

LONG -TERM DEBT Notes Payable & Cpital Lease,

623,654868,932 net of current portion1,484,2761,995,434Total Liabilities

598,724684,329DEFERRED INCOME TAXESSTOCKHOLDERS' EQUITY

100,000100,000 Common stock - par value $100, 1,0001,726,2472,242,431 Retained Earnings1,826,2472,342,431Total Stockholders' Equity

3,909,2475,022,194TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

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ABC ENGINEERING, INC.BALANCE SHEET

DECEMBER 31, 2001

LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT ASSETSCURRENT LIABILITIES132,341 Cash

225,932 Accounts Payable1,608,934 Accounts Receivable543,789 Line of Credit677,075 Work In Process356,781 Current Portion of Long Term Debt1,000 Prepaid Federal Income Tax

1,126,502Total Current Liabilities2,419,350Total Current Assets

LONG -TERM DEBTPROPERTY AND EQUIPMENT868,932 Notes Payable & Cpital Lease, net of current234,895 Vehicles

2,678,934 Furniture, fixtures and equip1,995,434Total Liabilities567,980 Leasehold improvements

684,329DEFERRED INCOME TAXES3,481,809878,965Less Accumulated Depreciation

STOCKHOLDERS' EQUITY100,000 Common stock - par value $100, 1,000 shares2,602,844Total Property & Equipment

2,242,431 Retained Earnings

2,342,431Total Stockholders' Equity

5,022,194TOTAL LIABILITIES & STOCKHOLDERS' EQUITY5,022,194TOTAL ASSETS

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BASIC MATH 1011,000

401,000

301,000

201,000

10--------

4,100

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The Income Statement

Sales - Pass thru billing = Net Sales - Direct Expenses = Gross Profit - Admin & Depreciation Expenses = Income from Operations+/- Other Income or Expenses = Income before Taxes - Taxes_______________ = Net Income

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ABC ENGINEERING, INC.INCOME STATEMENTDECEMBER 31, 2001

20002001SALES8,500,3069,765,492Gross Sales-321,675-237,854Less Pass Thru Billing

8,180,6319,529,639NET SALES

6,678,9087,675,234Direct Expenses1,501,7231,854,405GROSS PROFIT

622,345837,513Administrative Expenses101,876109,422Depreciation Expense777,502907,470Income from Operations

OTHER INCOME (EXPENSE)9,68712,341 Interest Income

-104,679-125,679 Interest Expense-94,992-113,338Total Other Expense

682,510794,132Income Before Federal Tax

238,878277,946 Federal Income Tax443,632516,186Net Income

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The Statement of Cash Flows

Cash from operations+/- Cash provided by or applied to investing activities+/- Cash provided by or applied to financing activities = Net increase or decrease in

cash

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ABC ENGINEERING, INC.STATEMENT OF CASH FLOWS

DECEMBER 31, 2001

Cash Provided by Operating Activities686,416 Net Income

Adjustments to reconcile net income to net cash provided by operating activities

323,215 Depreciation and amortization254,678 Deferred income taxes

12,000 (Gain) on sale of property Changes in operating asets and liabilities

-1,326,541 Accounts receivable9,854 Prepaid expenses

225,932 Accounts payable185,554 Net cash provided by operating activities

Cash Provided by (Applied to) Financing Activities123,465 Additional long-term debt

-251,876 Retirement of long-term debt150,000 Proceeds from notes payable-24,361 Retirement of notes payable

0 Issuance of common shares0 Purchase of treasury shares

-256,912 Bonuses paid-259,684 Net cash provided by (applied to) financing activities

-74,130Increase (decrease) in cash and cash equivalents

124,683Cash and cash equivalents, beginning of year

50,553Cash and cash equivalents, end of year

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MAY APRILDAYDRAW1st ofDRAW1st ofOFACCTMICHDEPOSITSACCTMICHDEPOSITSMTH

$125,000.00$8,758.001$23,717.502

$66,272.073$294,949.374

-$200,000.00$72,638.63$76,000.00$15,274.255$10,599.256

-$58,000.00$7,134.50$10,897.007$20,000.00$39,864.408

$107,608.509$37,588.2010$4,234.4811

$26,193.75$21,338.2512$37,627.85$15,000.00$10,212.1313$32,166.56$26,419.9414

$32,000.00$28,550.0015$40,149.0016

$188,499.5117-$68,000.00$248,393.5518

$39,726.50$123,490.8419$20,303.25$7,400.0020$12,256.78$62,877.1221

$83,442.9122$217,134.6523

$77,186.6024$19,787.7225$41,797.99$104,978.6626$93,674.08$7,809.2527

-$110,000.00$109,400.01$31,022.5028$51,836.7729$15,613.5530

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1ST-$258,000.00$0.00$478,582.77$221,000.00$0.00$216,718.9010 DYS

2ND-$68,000.00$0.00$597,145.45$47,000.00$0.00$257,560.1610 DYS

3RD-$110,000.00$0.00$354,103.18$0.00$0.00$574,715.4110 DYS

-$436,000.00$0.00$1,429,831.40$268,000.00$0.00$1,048,994.47TOTALS

CASH$993,831.40$1,316,994.47OPER

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FINANCIAL RATIOS

Bank most interested in Come from the Balance Sheet

Owners most interested in Come from the Income

Statement

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CURRENT RATIO

Test of short term solvency

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ABC ENGINEERING, INC.BALANCE SHEET

DECEMBER 31, 2001

2001CURRENT ASSETS132,341 Cash

CURRENT RATIO1,608,934 Accounts Receivable677,075 Work In Process

1Current Assets1,000 Prepaid Federal Income Tax2Current Liabilities12,419,350Total Current Assets

PROPERTY AND EQUIPMENT2,419,350 / 1,126,502 = 2.15234,895 Vehicles

2,678,934 Furniture, fixtures and equip567,980 Leasehold improvements

3,481,809

878,965Less Accumulated Depreciation2,602,844Total Property & Equipment

5,022,194TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES225,932 Accounts Payable543,789 Line of Credit356,781 Current Portion of Long Term Debt

21,126,502Total Current LiabilitiesLONG -TERM DEBT Notes Payable & Cpital Lease,

868,932 net of current portion1,995,434Total Liabilities

684,329DEFERRED INCOME TAXESSTOCKHOLDERS' EQUITY

100,000 Common stock - par value $100, 1,0002,242,431 Retained Earnings2,342,431Total Stockholders' Equity

5,022,194TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

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RULE OF THUMB

Current Ratio should be 2.0 : 1 or greater

PSMJ 2001 Median: 1.92

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THE ACID TEST RATIO

Quick Ratio

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ABC ENGINEERING, INC.BALANCE SHEET

DECEMBER 31, 2001

2001CURRENT ASSETS3132,341 Cash

CURRENT RATIO41,608,934 Accounts Receivable

677,075 Work In Process1Current Assets1,000 Prepaid Federal Income Tax2Current Liabilities12,419,350Total Current Assets

PROPERTY AND EQUIPMENT2,419,350 / 1,126,502 = 2.15234,895 Vehicles

2,678,934 Furniture, fixtures and equip567,980 Leasehold improvements

ACID TEST RATIO3,481,809

3+4Cash + Accts Rec878,965Less Accumulated Depreciation 2Current Liabilities2,602,844Total Property & Equipment

(132,341 + 1,608,934) / 1,126,502 = 1.565,022,194TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES

225,932 Accounts Payable543,789 Line of Credit356,781 Current Portion of Long Term Debt

21,126,502Total Current LiabilitiesLONG -TERM DEBT Notes Payable & Cpital Lease,

868,932 net of current portion1,995,434Total Liabilities

684,329DEFERRED INCOME TAXESSTOCKHOLDERS' EQUITY

100,000 Common stock - par value $100, 1,0002,242,431 Retained Earnings2,342,431Total Stockholders' Equity

5,022,194TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

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RULE OF THUMB

Acid Test Ratio should be 1.0 : 1 or greater

PSMJ does not calculate this ratio

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DEBT TO EQUITY RATIO

Total liabilities

Stockholder Equity

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ABC ENGINEERING, INC.BALANCE SHEET

DECEMBER 31, 2002

2001CURRENT ASSETS3132,341 Cash

CURRENT RATIO41,608,934 Accounts Receivable

677,075 Work In Process

1Current Assets1,000 Prepaid Federal Income Tax

2Current Liabilities12,419,350Total Current Assets

PROPERTY AND EQUIPMENT

2,419,350 / 1,126,502 = 2.15234,895 Vehicles

2,678,934 Furniture, fixtures and equip

567,980 Leasehold improvements

ACID TEST RATIO3,481,809

3+4Cash + Accts Rec878,965Less Accumulated Depreciation

2Current Liabilities2,602,844Total Property & Equipment

(132,341 + 1,608,934) / 1,126,502 = 1.565,022,194TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

DEBT TO EQUITY RATIOCURRENT LIABILITIES225,932 Accounts Payable

5Total Debt543,789 Line of Credit6Stockholder Equity356,781 Current Portion of Long Term Debt

21,126,502Total Current Liabilities1,995,434 / 2,342,431 = .85LONG -TERM DEBT

Notes Payable & Cpital Lease,868,932 net of current portion

51,995,434Total Liabilities

684,329DEFERRED INCOME TAXESSTOCKHOLDERS' EQUITY

100,000 Common stock - par value $100, 1,0002,242,431 Retained Earnings

62,342,431Total Stockholders' Equity

5,022,194TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

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RULE OF THUMB

Debt to Equity Ratio should be less than 1.0

PSMJ 2001 Median: 107.21%

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QUICK REVIEW

SAFETY & LIQUIDITYBalance Sheet

Current Ratio – 2 : 1 or greaterAcid Test Ratio – 1 : 1 or greaterDebt to Equity Ratio – less than 1

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RETURN ON SALES RATIO

Net Income Before TaxesNet Sales Revenue

PSMJ does not calculate this ratio

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DECEMBER 31, 2001

2001SALES9,765,492Gross Sales-237,854Less Pass Thru Billing

19,529,639NET SALES

Return on Sales2Income Before Taxes7,675,234Direct Expenses

1Net Sales1,854,405GROSS PROFIT

794,132 / 9,529,639 = 0.083837,513Administrative Expenses109,422Depreciation Expense907,470Income from Operations

OTHER INCOME (EXPENSE)12,341 Interest Income

-125,679 Interest Expense-113,338Total Other Expense

2794,132Income Before Federal Tax

277,946 Federal Income Tax516,186Net Income

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RETURN ON EQUITY

Return on Investment

PSMJ 2001 Median: 16.51%

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RETURN ON EQUITY

Net Income (Income Statement)Stockholders’ Equity (Balance Sheet)

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RETURN ON EQUITY

$794,132 = 33.9% $2,342,431

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RETURN ON ASSETS RATIO

Net Income (Income Statement)Total Assets (Balance Sheet)

PSMJ 2001 Median: 6.46%

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RETURN ON ASSETS RATIO

$794,132 = 15.8%$5,022,194

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AVERAGE COLLECTION DAYS

Avg Accounts Receivable (Bal Sht)Avg Daily Sales (Income Statement)

PSMJ 2001 Median: 66.64 days

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AVG ACCOUNTS RECEIVABLE

Prior yr Accts Rec + Current yr Accts Rec2

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AVERAGE DAILY SALES

Annual Gross Sales365

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AVERAGE COLLECTION DAYS

(1,608,934 + 1,098,234) / 2

9,765,492 / 365

= 50.6 DYS

PSMJ 2001 Median: 66.64 days

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ZETA FACTOR1. Working Capital (Current Assets – Current Liabilities) / Total Assets ___ X 1.2 = ___2. Retained Earnings / Total Assets ___ X 1.4 = ___3. Net Income before Tax & Interest / Total Assets ___ X 3.3 = ___4. Owner’s Equity / Total Debt ___ X 0.6 = ___5. Sales / Total Assets ___ X 1.0 = ___ Total

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ZETA FACTOR1. Working Capital (Current Assets – Current Liabilities) / Total Assets 0.26 X 1.2 = 0.312. Retained Earnings / Total Assets 0.45 X 1.4 = 0.623. Net Income before Tax & Interest / Total Assets 0.18 X 3.3 = 0.604. Owner’s Equity / Total Debt 0.75 X 0.6 = 0.455. Sales / Total Assets 1.94 X 1.0 = 1.94 Total 3.92

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