Superior Living, Inc. André A. Marks FINC615 – 1004B – 01: Applied Managerial Finance Instructor: Dr. Samara Kramer November 26, 2010

Objectives ❖ To give a brief financial introduction to the furniture industry ❖ To discuss the four primary financial statements used by Superior Living, Inc. ❖ Explain how data is collected to develop these financial statements ❖ Discuss what the financial statements measure ❖ Explain the linkage among the financial statements

Introduction to the industry ❖ There has been a dramatic dropped in high-end furniture purchases due to affluent consumers restructuring their priorities. They are only buying what they need. ❖ Consumer confidence crippled by a housing crisis has caused the bottom to drop out of the U.S. furniture market with a 13% decline in sales in the forth quarter of 2008 compared to forth quarter sales in 2007.* ❖ There are about 1 million fewer affluent household buying luxury furniture which equated to a $2 billion drop in the sales of high- end furniture between 2007 and 2008.* ❖ In the first 6 months of 2009, Ethan Allen sales were down by 30%, the most it had been since the great depression.** ❖ Ethan Allen introduces new technology to drive sales, and it is working. Consumers can upload photos of actual rooms in there homes and completely furnished their homes online or on their iPads with Ethan Allen furniture and accessories. ❖ During the first nine months of 2010, Ethan Allen sales increased by about 15% and the company recently opened its 45th store in China, of which over 280 operate worldwide.** ❖ Ethan Allen is making it work in America with over 70% of their products being manufactured in the U.S. and over 60% of their sales made abroad. This is a long-term strategy for recovery and growth.** Source: MarketResearch.com* and Forbes.com**

Four financial statements… ❖ The Balance Sheet ❖ The Income Statement ❖ Statement of Retain Earnings ❖ Statement of Cash Flows

Balance Sheet Assets ❖ Current assets ❖ Cash ❖ Accounts Receivable ❖ Inventory ❖ Total ❖ Fixed assets ❖ Net Plant and equipment ❖ Trademarks and patents ❖ Total assets Liabilities and Owners’ Equity ❖ Current liabilities ❖ Accounts payable ❖ Notes payable ❖ Total ❖ Long term debt ❖ Owners’ equity ❖ Common stock and paid-in-surplus ❖ Retain earnings ❖ Total ❖ Total liabilities and owners’ equity Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9 th edition, page 52.

Income Statement ❖ Sales ❖ Cost of goods sold ❖ Depreciation ❖ Earnings before interest and taxes ❖ Interest paid ❖ Taxable income ❖ Taxes (30%) ❖ Net income ❖ Dividends ❖ Addition to retain earnings Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9 th edition, page 53.

Statement of Retained Earnings ❖ Retained Earnings, December 31, previous year ❖ Plus: Net Income current year ❖ Total: ❖ Minus: Dividends Paid current year ❖ Retained Earnings, December 31, current year

Statement of Cash Flows Cash, beginning of year ❖ Operating activity ❖ Net Income ❖ Plus: ❖ Depreciation ❖ Increase in accounts payable ❖ Less: ❖ Increase in accounts receivable ❖ Increase in inventory ❖ Net cash from operating activity ❖ Investment activity ❖ Fixed assets acquisitions ❖ Net cash from investment activity ❖ Financing activity ❖ Decrease in notes payable ❖ Decrease in long-term debt ❖ Dividends paid ❖ Increase in common stock ❖ Net cash from financing activity ❖ Net increase in cash ❖ Cash, end of year Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9 th edition, page 50.

Sources and Uses of Cash Sources of cash ❖ Cash beginning of the year ❖ Operations: ❖ Net income ❖ Depreciation ❖ Working Capital: ❖ Increase in accounts payable ❖ Long term financing ❖ Increases in common stock ❖ Total sources of cash Uses of cash ❖ Working capital: ❖ Increases in accounts receivables ❖ Increase in inventory ❖ Decrease in notes payable ❖ Long term financing: ❖ Decrease in long term debt ❖ Fixed asset acquisitions ❖ Dividends paid ❖ Total uses of cash Net addition to cash Cash, end of year Source: Ross, Westerfield, & Jordon, Fundamentals of Corporate Finance, 9 th edition, page 50.

How is the data collected? ❖ The Bookkeeping process ❖ As the company records financial transactions over a period of time, the financial statements begin to appear. (Peavler, n.d.)

What do they measure? ❖ The Balance Sheet shows how much the company is worth. It shows the book value of the company’s net worth. ❖ The Income Statement is sometimes called the statement of profit and loss because it shows the company’s profitability. ❖ The Statement of Cash Flows measures the difference in cash flow for the year. It is divided into operations, investments, and finance. ❖ The Statement of Retain Earnings shows the change in the retained earnings account and dividends over a period of time. Source: Rosemary Peavler, About.com Guide

What links the statements… ❖ The balance sheet mirrors the accounting equation and state items in terms of book value. It is linked to the income statement by the DuPont Identity. ❖ The income statement is linked to the balance sheet because owners equity is made up of revenue and expenses, which is how the income statement is developed. It is also linked to the balance sheet by the DuPont Identity. ❖ The statement of retained earnings uses data from the balance sheet and income statement to make it’s calculations. ❖ The statement of cash flows uses data from the balance sheet and income statement to track the flow of cash.

References ❖ Brennan, M. (2010). Ethan Allen’s sales rebound from consumer confidence woes. Retrieved on November 25, 2010 from sales-rebound-from-consumer-confidence-woes/?partner=yahootixhttp://blogs.forbes.com/morganbrennan/2010/11/23/ethan-allens- sales-rebound-from- ❖ Finance.Yahoo.com. (n.d.). Ethan Allen Interiors Inc. Retrieved on November 18, 2010 from finance.yahoo.com/q/bs?s=ETH+Balance+Sheet&annual ❖ Investopedia.com. (n.d.). Statement of retained earnings. Retrieved on November 25, 2010 from ❖ Peavler, R. (n.d.). The relationship between the financial statements. Retrieved on November 25, 2010 from ❖ Peavler, R. (n.d.). Statement of retained earnings. Retrieved on November 25, 2010 from bizfinance.about.com/od/yourfinancialposition/tp/Statement_Retained_Earnings.htm

References ❖ Peavler, R. (n.d.). How to prepare a statement of cash flow. Retrieved on November 25, 2010 from ❖ Ross, S. A., Westerfield R. W., & Jordon, B. D. (2010). Fundamentals of Corporate Finance (9 th edition). New York, NY: McGraw – Hill/Irwin. ❖ Unity Marketing Inc. (2009). High end furniture market trend report. Retrieved on November 18, 2010 from &productid= http:// &productid=