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Notes for BUA321 Chapter 3

Chapter 03 Class Notes

I. Chapter 3 Statements and Ratios

The Stockholders’ Report

A. What can you do with this?

Investing / Company performance / Job search or interviews

B. Have you thought of an internship?Investing / company performance / job research

Traditional and adult students have opportunitiesP&G has an internship plan that works quite well with both groups.

Contact Career placement personJulie Mueller 344 3386

C. The practice of manipulating earnings in order to mislead investors is known as earnings management.

1. Why might financial managers be tempted to manage earnings?

2. Is it unethical for managers to manage earnings if they disclose their activities to investors?

1) Bonuses / ego / promotion2) Does this make sense?

Content Coordinator: Dr. Lawrence BYerly


II. The Income Statement

A. The income statement provides a financial summary of a company’s operating results during a specified period.

Concentrate on the concept of controlGP – productionOP – operating expenses / running the company NI – remaining control after financing and taxation

What does interest have to do with running the company?



III. Personal Finance Example

Go to the worksheet cash management and budget. Complete the personal income statement.


NamesCash Inflow Debt Cash FlowSalary $72,725 Mortgage (1st) $16,864Self Employment Mortgage (2nd)Dividends $120 Auto (1) $2,520Rents Auto (2)Alimony / Child Spt Credit Card 1Pensions etc. Credit Card 2Other Income $195 furniture $1,250

Subtotals $0 $73,040Total Cash Inflow $73,040

TaxesAll Federal Income $16,430State IncomeLocal Income Total Debt Pmts $20,634Real EstateOther Taxes

Subtotals $0 $16,430 Savings $0 $0Total Tax Cash Flow $16,430 Company Retirement

Personal RetirementPersonal Savings

Insurance Emergency FundHome Misc. Savings Auto Subtotals $0 $0Health $1,505 Total Savings Cash Flow $0Life $1,380Disability Cash Flow AnalysisDental Total Cash Inflow $73,040 %Misc Ins. Total Tax Cash Flow $16,430 22.495%

Subtotals $0 $2,885 Total Ins. Cash Flow $2,885 3.950%Total Ins. Cash Flow $2,885 Total Debt Pmts $20,634 28.250%

Total Savings Cash Flow $0 0.000%Living Expenses $33,091 45.305%


What is discretionary cash?Surplus cashWhat should you do with it?

The Balance Sheet


Cash Flow AnalysisTotal Cash Inflow $73,040 %Total Tax Cash Flow $16,430 22.495%Total Ins. Cash Flow $2,885 3.950%Total Debt Pmts $20,634 28.250%Total Savings Cash Flow $0 0.000%Living Expenses $33,091 45.305%

3 Avg % of Total Expenses 3 Avg % of Total ExpensesHousing GivingRent $0 0.000% Charitable $0 0.000%Telephone $0 0.000% Non-Charitable $0 0.000%Utilities $2,470 $2,470 3.382% Total Giving Expenses $0 $0 0.000%Maintenance $0 0.000%Furnishings $0 0.000% LeisureImprovements $0 0.000% Vacations $4,630 $4,630 6.339%Other $1,050 $1,050 1.438% Hobbies $0 0.000%Total Housing Expenses $3,520 $3,520 4.819% Entertainment (not cable) $0 0.000%

Cable $0 0.000%Family Restaurants $0 0.000%Groceries $5,825 $5,825 7.975% Other $0 0.000%Clothing $1,700 $1,700 2.327% Total Leisure Expenses $4,630 $4,630 6.339%Medical $0 0.000%Dry Cleaning $0 0.000% Summary ExpensesChild Care $0 0.000% Total Tax Cash Flow $16,430 22.495%Education $1,400 $1,400 1.917% Total Ins. Cash Flow $2,885 3.950%Legal $0 0.000% Total Debt Pmts $20,634 28.250%Alimony/ Chold Spt $0 0.000% Total Savings Cash Flow $0 0.000%Misc Family Expenses $2,415 $2,415 3.306% Living Expenses (here) $21,755 29.785%

Total Family Expenses $11,340 $11,340 15.526% Total Cash Outflows $61,704 84.480%

Transportation Discretionary IncomeGas and Oil $0 0.000% Total Cash Inflow $73,040Maintenance $2,265 $2,265 3.101% Total Cash Outflow $61,704Other $0 0.000% Discretionary Income $11,336 15.520%Total Transportation Exp. $2,265 $2,265 3.101%

Monthly Expenditures (or Add Most Recent in Column 3


Personal Finance

Complete the personal net worth worksheet


Assets Liabilities

Liquid Assets Totals % of Total Assets Consumer Debt Totals % of Total AssetsCash and Checking $665 Current BillsSavings Accounts $760 Credit Cards $665Money Market Funds $800 $2,225 1.512% Installment Loans $8,250

Other Debts $1,040 $9,955 6.764%Investment Assets

Long Term DebtShort-Term Assets Mortgage $92,000CD's Mortgage (2nd)Treasury Bills Life Insurance LoansOther ST Investments $0 0.000% Student Loans $3,800

Retirement Account Loans $95,800 65.093%Long Term InvestmentsStocks $2,250 Total Debt $105,755 71.857%BondsMutual Funds $1,500 Net Worth $41,420 28.143%IRA Retirement Accounts $2,000Corporate Retirement Accts $5,750 3.907% Total Liabilities and NW $147,175

Other InvestmentsBusiness OwnershipInvestment PartnershipsReal Estate Investments $0 0.000%

Personal AssetsResidence $120,000Automobiles $14,000Personal Property $5,200Other Personal Property $139,200 94.581%

Total Assets $147,175 100.000%

Lawrence Byerly PhD © 2013


What is net worth?

TA – TL = NWIf you would sell all your assets and pay off all your debts, the amount to live on .How does a mortgage impact Assets, liability, NW?

How does a student loan impact Assets, liability, NW

A. Statement of Cash Flows The statement of cash flows provides a summary of the firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.

B. This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.



VI Ratios

1) What is liquidity?

Ability to pay current obligationsHigher better; but can you be too liquid?

RatioCRQRCash Ratio

2) What does DCI stand for?

Day inventory sits on a shelfWhat is a good number?Better to have higher or lower number?Can the number be too small?

RatioDSODCIDPO

3) What does DSO stand for?

Avg time it takes for our customers to pay us?What is A/R?

Note discuss interest free loansWhat is a reasonable time?



How do you fix this?

4) What does TAT represent?

How efficiently do we use the total assets of the company?Is a big number better?What does FAT mean?Assume we have a number that is decreasing? What can we do?

RatioTAT

5) Describe leverage.

BorrowingIs borrowing good or bad?

6) What does the debt equity ratio measure?

Relationship between LT borrowing and shareholder equity.What does DR measure?

% of assets purchased by borrowing?When is a number too big?

RatioDebt ratioDebt equityTIE

7) What does the TIE ratio tell us?

Ability to pay on debt?Is this all there is?

What about principal?



8) Explain GPM, OPM, and NPM.

Discussed earlierControl of production; operations (running the business), all expenses

including financing expenses and taxation

RatioGPMOPMNPM

9) What does the PE ratio tell us?

Discuss the PE formulaPE = (Mkt price / EPS)

Discuss how we get the dataHow does PE ratio change?

RatioEPSPEBPSMkt to book

10) Explain the MKT / BV ratio

Explain the concept of buying the assets of a business (BV) and buying the stock (mkt price). Which would you rather do?

11) What is the difference between ROA and ROE?

ROA or ROI is very popular. (NI / TA)The challenge is comparability.ROA includes financing decisions.

BEP is a better measure of return on assets (EBIT / TA)



ROE return to owners?How can we increase thisPresent the dupont analysis

ROE = NI / CE = NI / Sales * Sales / TA * TA / CE = NPM * TAT * FLM

Ratio 2008 2009 2010 2011 2012ROEROABEP


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