Taylor Blaney

 Enterprise Operations vs. Financing Activities ◦ Enterprise Operations- business activities that are the purpose of the business ◦ Financing Activities- borrowing and lending to aid business purpose  Reformulation ◦ Separates income, assets, and liabilities of enterprise vs. financing ◦ Necessary step to find NEA and EPAT and to forecast future NEA and EPAT

 Finding which assets and liabilities are part of the enterprise operations  Threshold for cash is typically 2% of net sales  Some classes may have both enterprise and financing activities involved in them, typically included if some enterprise activity can be assumed

 Included in Enterprise Assets: Account Cash (2% of sales) Inventories Other Current Assets Property and Equipment Deferred Taxes Goodwill Other Intangible Assets Other Assets TOTAL

 Included in Enterprise Liabilities: Account Accounts Payable Accrued and Other Liabilities Other Liabilities TOTAL

 Subtract Enterprise Liabilities from Enterprise Assets to get Net Enterprise Assets-NEA Account Enterprise Assets Enterprise Liabilities NEA Total (EA-EL)

 NFL is the amount of financial assets less the financial liabilities that a company has in a given year  Foot Locker, Inc.’s NFL: Accounts Assets Cash and Cash Equivalents Short-Term Investments4800 Liabilities Long-Term Debt TOTAL (Assets-Liabilities)

 To check if work is correct take NEA and add or subtract Net Financial Assets or Liabilities, total should equal stockholders equity section Account NEA NFA Total (NEA+NFA) Stockholder’s Equity

 Involves income items that are associated with enterprise operations  Take items from the statement of earnings to compute  Adjusted for tax that was due to financing activities

Income Statement Item Sales6,1825,6235,049 Cost of Sales(4,148)(3,827)(3,533) Selling, General and Administrative Expenses (1,294)(1,244)(1,138) Depreciation and Amortization (118)(110)(106) Impairment Charges(12)(5)(10) Other Income244 TOTAL Enterprise Earnings Note: Leave out Interest Expense as a financing expense

 Must separate out the amount of income tax that is allocated to enterprise operations vs. financing activities  Use a 37% tax rate to allocate amount of tax attributed to financing activity  The only financing activity on the statement of earnings was interest expense

2012 Earnings from continuing operations Income taxes on continuing operations (37%) Earnings from continuing operations after tax Enterprise Financing(5)(1.85)(3.15) Total Reported

2011 Earnings from continuing operations Income taxes on continuing operations (37%) Earnings from continuing operations Enterprise Financing(6)(2.22)(3.78) Total Reported

2010 Earnings from continuing operations Income taxes on continuing operations (37%) Earnings from continuing operations Enterprise Financing(9)(3.33)(5.67) Total Reported

Income Statement Item Sales6,1825,6235,049 Cost of Sales(4,148)(3,827)(3,533) Selling, General and Administrative Expenses (1,294)(1,244)(1,138) Depreciation and Amortization (118)(110)(106) Impairment Charges(12)(5)(10) Other Income244 Income Taxes allocated to continuing enterprise operations (211.85)(159.22)(91.33) EPAT

Interest Expense(5)(6)(9) Income tax Benefit allocated to financing activities Financing Expense After Tax (FEAT) (3.15)(3.78)(5.67) The part of earnings that is not attributable to enterprise activities, these are the financing expenses

 After calculating EPAT and FEAT you can check to see if calculations were correct  EPAT= Enterprise Profit After Tax  FEAT= Financing Expense After Tax  To check, subtract FEAT from EPAT, the total should equal Net Income on statement of earnings

EPAT FEAT(3.15)(3.78)(5.67) Total Net Income (from statement of earnings)